The European Central Bank (ECB) hiked interest rates again on Thursday by the largest increment since the bank’s founding, as policymakers in the Eurozone scramble to stem the tide of rising inflation throughout the region.
Initially, ECB policymakers were divided between a 50 and a 75 basis point increase in the zero percent deposit rate. The consensus favored the latter as a necessary measure to curtail inflation, which has been on the rise in the Eurozone since 2020.
Eurozone inflation rose at a much more drastic rate following Russia’s controversial invasion of Ukraine on Feb. 24, which occasioned a wave of fossil fuel sanctions that drove up energy and gas prices throughout the Eurozone, contributing to general inflation throughout the region.
Barring any drastically unexpected events, the regimen of rate hikes in the Eurozone is expected to continue into the foreseeable future, with more increases likely to follow in the coming months.
The Russia-Ukraine war creates a multitude of delicate and sensitive factors that the ECB must weigh as it considers the appropriate course of action for the present economic situation. If the bank is too hawkish in raising rates, it could stymie economic activity and perhaps even trigger a recession. However, if the bank is too cautious, it could result in an inflationary cycle that would be much more difficult to address.
While the consensus in the ECB maintains that rate hikes are a necessary measure in these times of rapidly rising inflation, some voices of dissent have emerged to challenge the prevalent view of the European financial institution.
“Raising interest rates, as most expect it to do on Thursday (and by 75bp), may appease the uberhawks in Frankfurt and elsewhere, but this is a calculated bet to inflict suffering—lower growth and higher unemployment,” wrote economist Daniela Gabor in an opinion editorial for Financial Times.
Gabor attested that these rate hikes are an irresponsible financial policy designed not for the well-being of Europeans, but to avoid scapegoating from politicians and other policymakers who might point the finger at these policymakers for rising inflation.
“The history of central banking teaches us that policy paradigms die when they cannot offer a useful framework for stabilizing macroeconomic conditions, but never at the hands of central bankers themselves,” the economist wrote.
