The ECB’s dilemma: What you need to know
In the last year, the ECB raised interest rates in large increments 10 times in a row. After the rate hike to 4.5%, the key interest rate has been on hold at this high level since September of last year. Is this due to the conviction of the ECB? Probably not, more likely the currency guardians do not really seem to know what to do because they are stuck in a dilemma.
After inflation climbed to a historic record of 10.6% last year, the value decreased significantly in the second half of the year, but the topic of inflation is far from over.
According to German calculations, prices in December rose by 3.7% compared to the previous year, up from 3.2% in the previous month. In the eurozone, inflation rose by 0.5 percentage points to 2.9%. While the value has significantly decreased compared to the peak, it is still well above the ECB’s target of 2%.
Why the ECB is under increasing pressure The European Central Bank is in a dilemma because the economy is putting pressure on them to lower interest rates, as the high key rate is slowing down business investments. Taking out a loan is currently very expensive. This is particularly dramatic in the construction industry.
Due to the increased financing costs, demand has plummeted and more and more projects are at risk of failing. Now, even layoffs cannot be ruled out – a development that few could have imagined just a few years ago.
The high interest rate is stifling the economy, but it is not easy to lower rates because inflation persists. Especially when it comes to grocery shopping and filling up at the gas station, prices remain high for German citizens. According to tagesschau.de, there is no sign of relief, especially in food prices. Instead, prices in this area are rising again.
Geopolitical crises are exacerbating the situation On top of that, new turbulence in world trade is looming. After Houthi rebels attacked ships in the Suez Canal, captains have increasingly been choosing the safer but 5,500 kilometers longer route around Africa. This is a trend that continues.
The journey around the Cape of Good Hope takes five to eight days longer, which drives up freight costs and could also lead to supply shortages. In addition, extreme weather events could lead to poor harvests. Furthermore, high energy costs continue to burden the economy. In addition, the so-called „greedflation“ is hitting, which is the tendency of many companies to charge higher prices than necessary.
The inflation development remains exciting. The same goes for interest rate policy. Whether interest rates will actually fall again this year is completely uncertain. The fact that most market participants had already priced in interest rate cuts and drove prices to new highs in December was completely naive. Caution is advised instead.
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