“ECB raises rates by more than expected…”

The ECB raised interest rates by more than expected on Thursday increasing the benchmark deposit rate by 50 basis points to zero percent. Whilst ending its eight year with negative interest rates, the ECB also increased its main refinancing rate to 0.5% and promised to further increase rates possibly as soon as its next meeting on 8 September.  In a statement, the ECB said, “further normalisation of interest rates will be appropriate“…”The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.”  The Euro which had dropped to a two-decade low against the dollar earlier this month, strengthened around a half a percent on the ECB’s decision.  Meanwhile, the ECB also agreed to provide additional help to the 19-country currency bloc’s most indebted nations, approving a new bond purchase scheme entitled Transmission Protection Instrument, which is intended to cap the increase in their borrowing costs and limit financial fragmentation. In a statement, the ECB said, “The scale of TPI purchases depends on the severity of the risks facing policy transmission.” The ECB further added that, “the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries.”  As the ECB raises interest rates, those countries such as Italy, Spain and Portugal see their borrowing costs increasing and concurrently investors will ask for a bigger premium to hold their bonds.

UK Inflation

Increasing petrol and food prices last month pushed inflation in the UK to its highest rate in 40 years, according to official figures, increasing the likelihood of a half percentage increase in interest rate by the Bank of England next month.  According to the Office for National Statistics, the annual consumer price inflation increased by 9.4% in June, the highest since February 1982, up from the 9.1% in May.  This level of price increase is the highest seen in any of the Group of Seven since 1985.  There are however other European Countries that are currently experiencing faster growth in prices.  Since December, the BOE raised rates five times since December as it tries to combat inflation from becoming embedded in the UK economy and is expected to increase them further on 4 August.  Meanwhile, the ONS said that core inflation in June dropped to 5.8% from 5.9% in May and also pointed to a 42% year-on-year rise in petrol prices and an almost 10% increase in food prices as the main drivers of inflation last month had an impact on family spending. 

The Euro

On Thursday the euro slipped as the ECB was geared up for its first ever interest rate increase in over a decade whilst the political turmoil in Italy offset some of the relief following the restart of the Russian gas flow.  The euro after rising to $1.0230, dropped to $1.0185 in Europe, after three of Mario Draghi’s Italian government coalition partners snubbed a vote of confidence on Wednesday.  The Euro traded strongly during the week on bets the ECB could decide on a 50-basis point rate hike and after the Nord Stream 1 pipeline would reopen on a timely manner after 10 days of maintenance.  The operator of the link said flows had restarted on Thursday and Germany’s network regulator indicated that they were at pre-maintenance level of 40% capacity.  Meanwhile the EU has asked the member states on Wednesday to cut gas usage by 15% until March for emergency reasons, after President Vladimir Putin warned that Russian supplies distributed via the pipeline to Europe could be reduced and could even stop. 

Italy

Italian Prime Minister Mario Draghi resigned on Thursday after his government fell apart, setting the road for an early election, rattling Italy’s markets.  In a meeting with President Sergio Mattarella, Mario Draghi who is the former central banker and who led a broad coalition for 18 months tendered his resignation.  Mattarella asked Draghi to remain in a caretaker capacity.  Draghi’s coalition broke down on Wednesday when three of his main partners snubbed a confidence vote he had called to try to end divisions.  Italian bank shares dropped as much as 4% while the benchmark 10-year Italian bond yields climbed by more than 20 basis points to their highest in over 3 weeks.   The yield spread between Italian and German 10-year bonds was briefly greater than 240 basis points on Thursday.  The 50 basis point increase by the ECB lags behind that of the US Federal Reserve as the latter lifted rates by 75 basis points last month.  However, the Eurozone is much more exposed to the war in Ukraine and the threatening from the cutting of gas supplies by Russia that could lead to a recession within the bloc.  Concurrently policy holders are facing the dilemma of balancing growth while taking into account inflationary pressures. 

Oil

Oil prices dropped on Wednesday as US government data showed lower gasoline demand during the peak of summer and as interest rate hikes by the central banks to try to fight inflation spread fears of the economy slowing down.  Brent crude prices for September dropped settling at $106.92 a barrel while US West Texas Intermediate crude for August dropped by $1.96 to settle at $102.26 a barrel.  Meanwhile, government data showed that US gasoline inventories rose 3.5 million barrels.   Oil prices dropped by more than $5 on Thursday on higher US gasoline stockpiles and the possibility of a rate hike by the ECB.  Brent crude futures lost 3.6% to $103.04 a barrel after dropping 0.4% in the previous session while US West Texas Intermediate crude futures were down by 3.8% at $96.09 after a 1.9% drop on Wednesday. 

Malta:  Harmonised Index of Consumer Prices (HICP)

A press release dated 19^th July, 2022 shows that in June 2022, the annual rate of inflation as measured by the HICP was 6.1% up from 5.8% in May 2022.  The largest upward impact on annual inflation was measured in the Food and non-alcoholic beverages index (1.73%) while the downward impact was recorded in the Communication Index (-0.05%).  The HICP measures the price changes on a monthly basis of a representative basket of consumer goods and services.  The HICP is based on a series of EU regulations developed by Eurostat together with the EU Member States.  This measure is used to compare inflation across the EU. 

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