EU hikes interest rates for the 10 connective time by 0.25% as recession fears loom
The European Central Bank has hiked interest rates again for the 10th time running, this time by 0.25%.
The institution led by Christine Lagarde has done so to fight against stubbornly high inflation that has been plaguing consumers and companies in Portugal even though the decision could inch the country further towards a recession as higher borrowing costs put shoppers off spending and companies off investing.
The increase of a quarter-percentage point comes as central banks around the world, including the US Federal Reserve try to judge how much inflation busting medicine is too much before it poisons the economy and results in defaults and Job cuts.
The decision raises the ECB’s benchmark deposit rate to 4%, up drastically from -0.5% just over a year ago to the now highest interest rate set since the euro currency was established in 1999.
Just one week ago, the Organisation for Economic Co-operation and Development (OECD) told Brussels that further reforms were needed to help the post-pandemic European economic recovery.
The EU needed to bolster the single market and keep a restrictive monetary stance if it wanted to tackle inflation and boost the resilience of the European economy, the OECD said in a report.
Published on September 6, the OECD said the “European Central Bank (ECB) needs to raise interest rates for as long as possible to put inflation back on a sustainable path towards its 2% target”.
The latest data in August showed that inflation across the 20 eurozone countries was 5.3%, with projections expecting it to decrease to 3.2% in 2024.
According to Trading Economic’s August data, Portugal’s annual inflation rate edged up to 3.7% in August this year, marking the first increase in 10 months, compared to 3.1% in July.
After a strong rebound in early 2023, economic growth in Portugal is set to weaken in the second quarter of the year and to pick up again thereafter according to the EU.
Headline inflation is projected to moderate although wage adjustments amid record high employment are expected to keep pressure on prices of services. After narrowing to 0.4% of GDP in 2022, Portugal’s general government deficit is forecast to improve to 0.1% of GDP in 2023 and 2024.
“After reaching a historic high of 10.2% (YoY) in 2022-Q4, HICP inflation moderated to 8.4% (YoY) in 2023-Q1. The reduction was largely driven by lower energy prices while food prices remained elevated.
“Inflation is set to moderate further over the forecast horizon, driven initially by the energy price index and later by food and non-industrial goods. In 2023, the moderation in food prices is also supported by a suspension of VAT rates for essential food products effective from April 18 until end-October. Overall, inflation is forecast at 5.1% in 2023 and 2.7% in 2024. Core inflation is expected to move somewhat above the headline rate, as the projected recovery in real incomes will weigh on prices of services, which are also set to moderate but at a softer pace”, states the EU inflation forecast for Portugal.