Russian Gas Supply Key Factor for Recession as ECB Hikes Rates by 50 BPS

The European Central Bank (ECB) raised key interest rates by 50 basis points on Thursday to curb the raging inflation – marking the first rate hike in 11 years. ING chief economist Carsten Brzeski said the hike was “the right thing to do”, adding that the Russian gas supply will play a pivotal role in determining whether recession in Europe will be mild or severe.

A Recession Would Make Raising Interest Rates Much More Difficult in Winter, Says Brzeski

At today’s ECB press conference, the central bank’s president Christine Lagarde announced the first rate hike in 11 years. The bank raised key interest rates by 50 basis points, higher than the bank’s previous guidance of 25 basis points.

Reflecting on ECB’s decision to introduce a bigger-than-expected hike, ING’s global head of macro Carsten Brzeski said: “It’s the right thing to do, in all honesty, the E.C.B. has now been a really late starter.”

With many expecting a global recession as inflation continues rising to new highs, Brzeski also said it will be Russia’s gas supply that will determine the severity of the recession. However, if a recession occurs in the winter, “this will not be the time to raise interest rates,” he added.

Lagarde said the 50 bps rate hike is set to reinforce “the anchoring of inflation expectations” and allow the bank to attain its inflation target in the long run. She added that the key objective here is to prevent inflation from affecting the public psyche in a manner that would make higher prices of goods and services more permanent. Last week, a higher-than-anticipated CPI print of 9.1% increased the probability of a 100 bps rate hike in the U.S. later this month.

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Europe’s Strong Rate Hike Welcomed by Investors

While neither record-high inflation nor elevated interest rates are viewed as a positive for companies and their earnings, many investors believe that rising interest rates are the lesser of two evils given the circumstances. As such, a number of investors welcomed today’s stronger-than-expected rate hike, leading to gains in the stock market.

“The policy of most regret is to let inflation become unhinged,” said James Athay, the investment director at Abrdn, a fund manager.

Looking ahead, Lagarde said ECB’s “future policy rate path will continue to be data-dependent,” adding the bank is clearly on a path to normalization. The euro, which broke its 1:1 parity with the U.S. dollar earlier this month for the first time in 20 years, moved 0.5% higher against the greenback on ECB’s announcement.

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