ECB: towards a probable 75 basis point rate hike

Consumer prices continue to rise, forcing the European Central Bank to take strong measures. After raising its key rates by 50 basis points for the first time, the ECB is preparing to raise them again. Money markets are preparing for a 75 basis point increase.

Inflation soon to exceed 10%.

According to data published by Eurostat, consumer prices in the eurozone rose by 9.1% year-on-year in August, compared with 8.9% in July. Inflation is rising fast, and should exceed 10% in the months ahead.

It is now the rise in production costs that is beginning to make itself felt, with service prices up 3.8%, industrial goods up 5% and food prices up 10.6%, while the impact of energy prices on overall price rises has fallen very slightly.  

After years of negative interest rates, the European Central Bank raised its key rates for the first time by 50 basis points in July. At the time, the likelihood of a further increase on September 8 was raised by the Bank's President, Christine Lagarde.

Central banks approve rate hikes

The ECB's new rate hike, which was to have been 50 basis points, is now likely to reach 75 basis points, as the markets forecast on Thursday September 1 with an 80% probability.

The ECB had not applied such a rate hike since 1999. For the next 20 years, rate hikes never exceeded 25 basis points.

The probable 75 basis point increase is not contested by central banks, most of whom are calling for strong measures to combat rising prices, even if such measures would put the brakes on economic activity.

According to Joachim Nagel, member of the ECB Governing Council and President of the Deutsche Bundesbank, a sharp rise in key interest rates is needed in September, followed by further increases in the months ahead.

ECB Executive Board member Isabel Schnabel sounded a similar note, declaring at the Jackson Hole symposium on August 26 that " sacrifices " were necessary to fight inflation, " even at the risk of reduced growth and higher unemployment ".

However, according to some economists, since inflation is not progressing at the same pace in all eurozone countries, the application of a single monetary policy is likely to be ineffective. Furthermore, government bond yields will be directly impacted by the ECB's rate hike.