The European Central Bank (ECB) raised interest rates by 0.75% percent yesterday. This increase follows the earlier increase in July, the month when the ECB raised interest rates by 0.5% for the first time in 11 years.
This interest rate increase brings the deposit rate back above zero for the first time since 2014 (i.e. it was -0.5% before that, and currently 0.75%).
No more forward guidance
Like the U.S. central bank, the ECB abandoned so-called “forward guidance” in July. Forward guidance means that the central bank gives more clarity in advance about its policy plans regarding interest rates.
At the moment this is not the case and the ECB is guided by the latest economic data. This has now led to an interest rate increase of 0.75% percent.
The big goal of the interest rate hikes may be clear, to slow down inflation. In August, the Eurozone faced an average inflation rate of 9.1 percent.
That figure represents an absolute record for the currency union. Investment strategist Vincent Juvyns of JPMorgan is particularly concerned concerns About the effects of the energy crisis in the Eurozone.
This potentially puts the ECB in an awkward split. On the one hand, Europe’s main central bank has the objective of keeping inflation in check, but on the other hand, support for high energy bills seems necessary.
Protecting consumers and businesses when it comes to energy bills may have a bad effect on inflation.
Little faith in ECB capabilities
Economist Brzeski of Dutch ING is not convinced that the ECB has what it takes to curb inflation. Aggressive interest rate increases are not the tool the eurozone needs at the moment, according to the economist.
“The economy is far from overheating and will almost inevitably end up in a winter recession, even without further interest rate increases,” said Brzeski, who advocates a more gradual approach from the ECB.
The pace of interest rate increases is expected to slow after today’s decision. Economists at UK asset manager abrdn are betting on smaller increases for October and December.
“Looking ahead, it is possible that the ECB will raise interest rates again in October. But it is hard to imagine the ECB raising interest rates further after that, given the expected winter recession in the eurozone,” Brzeski reiterated.
What does this mean for bitcoin?
For bitcoin, the ECB’s interest rate hike is not good news at first. The absolute scarcity of 21 million units is what makes bitcoin special compared to fiat money. With the interest rate increase, the relative scarcity of the euro increases.
If you combine this with the high inflation rate (12% right now) and the winter recession that many economists are predicting, and there is a difficult scenario for bitcoin. After all, both high inflation and a recession mean that individuals and businesses have less to spend.
The hand goes on the chin when it comes to investing and there is a flight to fiat money. After all, it is still the euro that everyone has to pay the bills with. In times of great uncertainty you see many people fleeing to that relatively safe haven.
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