Following the increase, the ECB’s base interest rate was 4.5% annually, the deposit rate was 4% and the European regulator’s short-term lending rate was 4.75%. In this respect says In the press statement made after the board of directors meeting;
The regulator explained its decision: “The Governing Council is committed to ensuring that inflation returns to the medium-term 2% target in a timely manner.”
According to their forecasts, inflation in the Eurozone will average 5.6 percent in 2023. The ECB expects this to be 3.2% next year and 2.1% in 2025. The European Central Bank announced that the parameters for 2023 and 2024 were increased and this reflects the high dynamics in energy prices.
It was stated that core price pressures continue to be high in Europe. However, the ECB expects inflation excluding energy and food to average 5.1 percent in 2023, 2.9 percent in 2024 and 2.2 percent in 2025.
What will happen to Europe now?
Anton Tabakh, chief economist at rating agency Expert RA, said the European regulator’s decision was expected. Inflation in the Eurozone was 5.3 percent in August.
“The ECB completed its interest rate hike cycle today. The weakening economy of the eurozone will no longer allow monetary policy to be tightened. The increase in key interest rates at the ECB would lead to an increase in deposit and lending rates by a comparable amount, namely 25 basis points. “This is an important value for the European economy, which has become accustomed to living with near-zero interest rates in the last 15 years,” he said. Sovcombank chief analyst Mikhail Vasiliev.
The expert said that increasing deposit rates would increase the attractiveness of savings for Europeans, reduce consumption and slow down inflation. At the same time, lending and refinancing will become more expensive, Europeans will spend more on debt payments, leaving less money available for consumption, he added. But this will also slow down price growth.
Vasiliev did not rule out that the eurozone economy will fall into stagflation (a combination of high inflation and weak economic growth or even stagnation. – socialbites.ca) this year as well. He added that stagflation could be long-lasting. According to Vasiliev, the German economy, the leading economy in the eurozone, is already on the verge of stagflation.
“Slowdown in the global economy due to persistently high price growth, high debt burden in euro zone countries, the highest rate of the US Federal Reserve System in the last 22 years (5.25-5.5. – socialbites.ca). Vasiliev said that the slowdown in the Chinese economy, the deterioration of US-China relations and the Ukrainian conflict negatively affected the European economy.
The analyst believes that the eurozone’s GDP will remain close to zero by the end of the year.
“The European economy looks weaker than the American economy. “For this reason, the euro will weaken against the dollar in the coming quarters,” he said.
Vasiliev expects the euro to weaken further against the dollar from the current 1.07 to 1.04-1.05 in the coming months. Oksana Kholodenko, head of analysis and promotion department at BCS World of Investments, noted that the euro exchange rate has already responded to the decision of the European Central Bank with a decline against the dollar. He believes that locally the EUR/USD exchange rate could fall to around 1.05 and will continue to fall in the medium term.
What consequences await Russia?
Vasiliev identified three consequences of the ECB’s decision for Russia.
“First of all, Europe and Russia maintain their economic ties. The Russian Federation continues to supply some liquefied and pipeline gas, as well as oil and petroleum products, to the European Union through intermediaries. Imports from Europe to Russia are also made through third countries. “This is a parallel and gray import,” Vasiliev stated.
Therefore, he now concluded that the ECB’s decisions will affect Russia through the state of the European economy. The higher the economic growth in Europe, the higher the demand for Russian raw materials and vice versa.
Secondly, the analyst stated that the ECB’s decision could lead to more cautious behavior in the business world, a reduction in investment programs and, as a result, a decrease in purchases of Russian export goods. However, he believes that this impact will remain small for Russia until a full-fledged recession emerges in Europe. Vasiliev said the recession would already lead to a noticeable decline in demand for gas, oil, oil products and other Russian exports.
However, the ECB’s decision also has a positive moment for Russia.
“Tightening financial conditions will lead to a slowdown in inflation in Europe, which will mean lower prices for Russian buyers to purchase European goods. This will help reduce the part of inflation in Russia associated with imports from Europe,” Vasiliev explained.
However, he explained that this effect will be moderate and will take a few months to manifest itself.
Associate Professor Olga Panina, Candidate of Economic Sciences at the Finance University affiliated with the Government of the Russian Federation, noted that in the current situation, the impact of the ECB’s decision on Russia and Russians is indirect and that it should be waited for more than three months. . According to Panina, an increase in the base rate could lead to a strengthening of the euro against the ruble, putting further pressure on exporters and making imports more expensive.
“The price of the euro against the ruble may increase in the short term. By the end of September, the euro will most likely be in the range of 102-106 rubles. But over a longer period of time, the ECB’s decision will no longer affect the ruble,” said BitRiver financial analyst Vladislav Antonov.
As a rule, the exchange rates of euro, dollar and yuan vary almost parallel to the ruble; “They either grow together or they fall together,” he explained.
According to Vasiliev, previously the Russian financial system was connected with the European system, so the decisions of the ECB primarily affected the Russian financial markets, that is, the rates of deposits and loans of Russian companies and citizens in euros. Now the role of the euro in Russia has decreased significantly: Russian companies are prohibited from withdrawing financing in this currency, most Russian banks can no longer place assets in this currency, so banks are moving away from attracting deposits in euros.
In addition, the Central Bank of the Russian Federation continues its dedollarization policy to move the Russian economy and financial system away from the dollar and euro, the currencies of unfriendly countries.