On July 21, the European Central Bank raised interest rates by 50 basis points. The European Central Bank raised interest rates for the first time in 11 years as it seeks to reduce inflation. This ended negative interest rates in the euro area. Previously, the euro zone's June CPI was 8.6%, a multi-decade high.
The European Central Bank's rate hike took the market by surprise. Analysts had expected a slight increase of 25 basis points. “The European Governing Council believes that it is appropriate to take a larger first step on the path to normalization of policy rates than suggested at the last meeting,” the ECB said in a statement on Thursday.
The euro rose to session highs at $1.0257 on news of a more aggressive rate hike. Italian 10-year bond yields also rose on the news, extending gains after reacting to Prime Minister Mario Draghi's resignation earlier on Thursday.
The euro zone is currently faced with two irreversible situations.
First, there is the recession of the Eurozone economy. Annual growth in euro zone energy prices was nearly 42% in June, compared with 39% in May. The sharp rise in energy prices has become the main culprit in European inflation, and high inflation will drag down the European economy.
In addition, the German economy is running a trade deficit for the first time, which means that the German economy, the strongest in Europe, has already experienced a severe downturn. The rest of Europe will be more difficult. In fact, the European economy is already in recession.
Raising interest rates is a double-edged sword. Although it can reduce inflation, it will also bring a bigger blow to Europe's sluggish economy.
Second, is the fall of the euro. The euro has fallen 11% so far this year. Compared with the peak of the euro in 2008, it has fallen by 36%. EUR/USD is almost 1:1, maybe in the near future, EUR/USD may fall below 1:1. The European Central Bank's interest rate hike can boost the euro in the short term, but it will hit the European economy even more.
The currency of a region will decline as the economy declines. And now, Europe is in the midst of its biggest crisis since the establishment of the euro zone.
The Ukrainian war is consuming the entire euro area, and even if the Ukrainian war ends, it will be difficult for the European economy to return to its pre-war situation in the short term.
At the same time, in the field of new economy (including the Internet, chip semiconductors, and new energy electric vehicles), European countries are significantly behind China, South Korea, Japan and other countries in Asia.
A recession in Europe is a foregone conclusion, and a recession in the European Union, one of the world's largest economies, will weigh on the global economy. For the stock market, it may also play a negative role.
What do you think?
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