#European Central Bank May Announce a Scale of Hike in Interest Rates

On April 14th, it was reported that the European Central Bank’s regulatory committee, Wen Shi, stated that the European Central Bank can completely stop reinvesting its asset purchase program this year. The interest rate hike in May will be between 25 and 50 basis points, and the scale of the hike will largely depend on the April core inflation rate. (Golden Ten)

European Central Bank Regulatory Commission Wen Shi: The European Central Bank can completely stop reinvesting its asset purchase program this year

On April 14th, 2021, Wen Shi, the European Central Bank’s regulatory committee, announced that the bank can halt the reinvestment of its asset purchase program this year. Moreover, the committee stated that the interest rate may increase between 25 and 50 basis points, and the scale of the hike would primarily depend on the April core inflation rate. In this article, we will discuss the implications of these announcements and their possible effects on European economies.

The European Central Bank’s Asset Purchase Program

The European Central Bank (ECB) introduced the Asset Purchase Program (APP) in 2015 to fight low inflation and slow economic growth. The program entails buying government and corporate bonds worth 20 billion euros per month. The program was initially launched for an indefinite period but has undergone several modifications to its execution. To ensure the longevity of the program, the ECB also reinvested the amount paid against the maturing bonds.

The Hike in Interest Rates

The interest rate is the price European banks charge each other for loaning money. The ECB adjusts this rate to influence inflation rates in the Eurozone inflation rates. Higher interest rates result in increasing borrowing costs, which slows down economic growth, while lower interest rates increase borrowing, promoting economic growth.
The regulatory committee’s announcement suggests that the bank is considering halting the reinvestment of the APP and may increase the interest rate to combat high core inflation rates. A core inflation rate is the measure of inflation, excluding food and energy prices, and is often considered more accurate when analyzing price trends. The scale of the hike will entirely depend on the inflation rates for April 2021.

Implications of ECB’s Announcements

The implications of ECB’s announcements have sparked debates amongst researchers and policymakers; some argue that halting the APP program will increase borrowing costs, causing instability in financial markets. On the other hand, the hike in interest rates can help control inflation rates, which may reduce the chances of a recession.
Moreover, countries such as the UK, the US, and China practice quantitative easing programs to support their economies. The ECB’s decision to halt the reinvestment of the APP program can lead to an asymmetric period ahead of the central banks globally.

The Effect on European Economies

The ECB’s decision can have varying effects on European economies, depending on the hike’s scale and inflation rates’ response. A 50-point hike can harm bonds and stocks, where lower-rated releases fare worse. Bonds perform poorly because their relatively low-interest rates will not attract investors and cause their yield to increase. Stocks can also lose value since higher interest rates increase stock selling and lower demand.
On the other hand, a 25-point hike can stabilize inflation rates and lead to economic growth, as it may stimulate borrowing and investment.

Conclusion

The ECB’s announcements of halting APP and hiking interest rates can have significant implications for global finance and the Eurozone economy, depending on their responses. It remains unclear whether the hike in interest rates will stabilize inflation rates, affecting economic growth, or lead to instabilities in financial markets.

Frequently Asked Questions (FAQs)

#Is stopping the APP program the right decision?

The decision to halt the APP program is still under debate. The ECB may have made the right choice in curbing inflation rates but may cause instability in the short term.

#Will the ECB’s decision impact global markets?

The ECB’s decision can impact global markets, especially if there is a significant hike in interest rates, which can increase borrowing costs and cause instability in financial markets.

#How can individuals prepare for the hike in interest rates?

Individuals can prepare for the hike in interest rates by reviewing their borrowing and investment plans, as higher interest rates can affect them. It is best to consult with financial advisors to make the most appropriate decisions.