On September 8 local time, the European Central Bank announced that it would increase the deposit mechanism interest rate, main refinancing interest rate and marginal lending interest rate by 75 basis points to 0.75%, 1.25%, and 1.5%.

Reporter | Qian Boyan Published from Frankfurt

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On September 8, local time, the European Central Bank announced that it would increase the deposit mechanism interest rate, main refinancing rate and marginal lending rate by 75 basis points to 0.75%, 1.25%, and 1.5%. The 75 basis points hike rate hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hiccup hi

The ECB stated in its interest rate resolution document that this major move is an important step in the transition from the current highly easing policy interest rate level to ensuring inflation returns to the ECB’s medium-term target of 2%. Inflation remains too high and is likely to remain above the target for a longer period of time, which is the main reason that has led to the central bank's decision.

Compared with the two interest rate hikes suggested by the European Central Bank when it held a monetary policy meeting in June, and the two interest rate hikes suggested by the Governor Lagarde at the annual meeting in Sintra, Portugal, the ECB selected 50 basis points and 75 basis points respectively on July 21 and September 8 respectively, which significantly exceeded expectations. The interest rate hike in July marks the eurozone's official farewell to the eight-year era of negative interest rates.

's continued deterioration in inflation data is the primary factor driving the ECB's record rate hikes.

Even the euro zone with energy and food prices with large price fluctuations is also as high as 4.3%, exceeding the previous value of core inflation in July and June 4.0% and 3.7%. The inflation data that has never peaked in

will even climb further in the fall.

, especially after Russia suspended the supply of natural gas indefinitely on September 2, because of the technical problems of the turbine in the Nord Stream 1 natural gas pipeline compressor station, the energy price represented by the Dutch TTF benchmark natural gas futures price continued to rise. The former is currently still at a historical high above 200 euros/megawatt hour. A package of people-friendly policies to curb inflation, Germany, the largest economy in the EU, also expired in September. Joachim Nagel, the governor of the German Central Bank, predicted that the country's inflation will reach more than 10% in the fall.

In addition, this year, the interest rate hike has been raised by 225 basis points this year, and the federal funds rate range has been raised to 2.25%-2.5%, the Federal Reserve has gradually expanded the interest rate spread between the two major economies of Europe and the United States. The continued flow of international capital to the United States has caused the euro to depreciate by more than 20% against the US dollar this year and has fallen below parity, the lowest level in 20 years.

The euro is too weak, making the EU's foreign dependence and energy products mainly denominated in US dollars more expensive, and also causing the EU's international payment support to continue to deteriorate and further pressure on the euro exchange rate . Trade data released by the European Statistics Office on August 16 showed that the eurozone's trade deficit in June was as high as 24.6 billion euros, with a trade deficit for eight consecutive months. The main reason for the expansion of the trade deficit month by month is still the surge in imports. Although the eurozone's exports increased by 20.1% year-on-year to 252.2 billion euros in June, the imports increased by 43.5% year-on-year, and it exceeded the former, and reached 276.8 billion euros.

The European Central Bank's sharp interest rate hike can stabilize the euro, which continues to fall in the dark to a certain extent. Commerzbank currency expert Ulrich Leuchtmann believes that the euro, affected by the energy crisis and the risk of recession, can only stabilize the downward trend even after interest rates hikes, but will remain below the US dollar until the spring of 2023.

High inflation and weak euro have made the voices of hawkish policymakers within the ECB.

In the 25-member European Central Bank's board of directors, the members who originally held hawkish stance were mainly the Netherlands and the governors of the three central banks of the Baltic countries, which were deeply affected by nearly 20% inflation.At the Jackson Hall Global Central Bank Annual Meeting at the end of August, Isabel Schnabel, the ECB Executive Committee member who represented Lagarde, sent a strong hawkish signal to the outside world, "The longer the inflation stays high, the greater the risk of the public losing confidence in our determination and ability to maintain purchasing power. If the central bank underestimates the stubbornness of inflation and simply slowly changes its monetary policy, the corresponding cost may be quite large." The speech of the executive committee member who can partially represent Lagarde's views also reflects that hawks are mainstream within the European Central Bank Council. In addition to the German Central Bank President Joachim Nagel, who has always regarded inflation as a "flood", French Central Bank President François Villeroy de Galhau also clearly expressed support for a sharp interest rate hike in September.

The only members of the board of directors who have always maintained a dovish stance remained the former governor of the central bank. The rapid increase in interest rates will cause the yields of government bonds in countries such as Italy, Spain, Portugal and Greece to rise rapidly and push up financing and interest repayment costs. The 10-year Treasury bond yield spread in Germany/Italy has climbed to 230 basis points from 135 basis points at the beginning of the year.

However, the European Central Bank has launched a new financial instrument TPI (conduction protection tool) on July 21, by purchasing unlimited targeted bonds from southern European countries at the time of need to curb the treasury bonds of north and south countries in the euro zone interest spread .

The factor that led to the doves' gradual loss of power is that Philip Lane, the chief economist of the ECB, one of the executive committees, is declining. The previous forecasts of the euro zone inflation rate by Lane-led departments are all far lower than the actual data. For example, the bank's June forecast of 2022 6.8% inflation rate has been significantly different from the current monthly 9.1%.

In the interest rate decision of the day, the European Central Bank has raised the average inflation rate in 2022 to 8.1%, while the estimated inflation figures in 2023 and 2024 were 5.5% and 2.3%.

BNP Paribas Senior economist Spyros Andreopoulos said the importance of the ECB's forecast data is declining significantly, and monetary decisions will focus more on current inflation data than on internal inflation forecasts.

As for the extent to which this rate hike can suppress inflation, Bundesliga President Joachim Nagel said: "The high inflation phase may last longer, and the current inflation wave will only slowly fade."

North Deutsche Bank analyst Tobias Basse also expects the price response to interest rate changes to three to six months, saying that "central banks are facing a dilemma: they must fight high inflation expectations in private households, while interest rate hikes like the Federal Reserve will severely curb economic development and thus threaten a recession. The European economy is facing a soft landing."

Danske Bank economist Piet Christiansen said: "The rise in natural gas prices will not only push up inflation , but also increase the risk of economic collapse. The ECB is raising interest rates during the economic downturn."

However, according to the latest GDP data released by the European Bureau of Statistics on September 7, the seasonally adjusted GDP in the euro zone and the EU in the second quarter increased by 0.7% and 0.8% month-on-month, respectively, and 4.1% and 4.2% year-on-year respectively, but the year-on-year growth rate of the group has declined from the previous value of 5.4% and 5.5% in the first quarter.

In its interest rate resolution, the European Central Bank expects the eurozone to fall into economic stagnation in the fourth quarter of this year and the first quarter of next year, with annual economic growth targets for 2022 lowered to 3.1%, and 2023 and 2024 lowered to 0.9% and 1.9%.

, the European Central Bank, which raised key interest rates to 1.25%, remains the most conservative central bank among the world's major economies. In addition to the Federal Reserve, which has raised interest rates by 225 basis points, Bank of England started interest rates as early as December last year and has raised interest rates by 165 basis points, maintaining the key interest rate at 1.75% level; the Bank of Canada has raised interest rates by 300 basis points and raised the key interest rate to 3.25%; RBA 5 has raised interest rates by 225 basis points, maintaining the key interest rate at 2.35%.

Regarding the neutral interest rate issue mentioned by Lagarde, most financial institutions expect the interest rate to be in the range of 2% to 2.25%, which also means that the ECB will continue to raise interest rates by 50 basis points respectively at monetary policy meetings in October and November.