European Union Countries: “Clarion Call” to Tighten Policies

With the improvement of the global epidemic, economic recovery and rising inflation have accompanied it. Although the Federal Reserve and the European Central Bank have not acted for the time being, many countries have already sounded the “clarion call” to tighten policies.

On June 22, local time, in response to rising price pressures during the rapid economic recovery, the Hungarian Central Bank raised the benchmark interest rate by 30 basis points to 0.9%, becoming the first European Union national central bank to raise interest rates after the new crown crisis. The overnight deposit interest rate was unchanged. As expected, it remains unchanged at minus 0.05%.

It should be noted that the rate of this increase is higher than expected. Previously, the market only expected the Hungarian Central Bank to raise interest rates by 25 basis points. The senior officials of the Hungarian Central Bank have warned earlier that a new round of interest rate hikes will begin this month to curb the rise in inflation.

From the perspective of economic data, the Hungarian economy is expected to record double-digit growth in the second quarter, and the annual overall inflation rate in May was 5.1%, which was the same as in April. Both significantly exceeded the central bank’s 2%-4% policy target. Interval.”

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The general background for the interest rate hike in Hungary is that as the US economy restarts and prices rebound rapidly, Fed officials have begun discussing ending the bond purchase plan and have advanced their expectations for the first interest rate hike after the epidemic last week.

The economic boom in the United States is also pushing up global inflation, and many central banks have been forced to raise interest rates. The Central Bank of Russia has raised interest rates three times this year, raising the benchmark interest rate to 5.5%, and Governor Nabi Urina said that Russia will continue to raise interest rates. The Central Bank of Brazil announced earlier that it would raise interest rates by 0.75 percentage points for the third time in a row, and hinted that there may be more substantial interest rate hikes in the future to combat inflation exceeding 8%. The Central Bank of Turkey sharply raised its key interest rate to 19% in March to combat double-digit inflation and the continued depreciation of the lira.

In addition to Russia, Brazil, Turkey, Hungary and other countries have raised interest rates in response to inflation, the Norges Bank also said last week that it will raise interest rates in September, and it is expected that central banks in the Czech Republic and other countries will also raise interest rates soon.

In stark contrast to this, the European Central Bank is still very loud, and continues to be bearish on inflation risks. European Central Bank President Lagarde refused to compare the United States with the Eurozone, saying that the U.S. economy is recovering much faster than the Eurozone. “The situation in the United States and Europe are obviously different, and it is easy to compare them, but considering the many differences between the two economies, it is not very wise to do so.”

Lagarde said that the acceleration of inflation in the United States will only have a limited impact on the euro zone. Although rising inflation in the United States will bring some “spillover effects”, including rising import prices, stronger exports, and even Eurozone people’s expectations for inflation may also rise. “But overall, the impact on the Eurozone Harmonized Consumer Price Index (HICP) is expected to be moderate.”

As for the key issue of when to tighten the faucet, the current market generally expects that the European Central Bank will tighten policy in the second half of the year, but it will not act earlier than the Fed. Goldman Sachs predicts that the European Union may decide to tighten its bond purchase plan in September, and it may no longer rely on the fiscal austerity policies implemented in the past. As for the Fed, analysts predict that hints to curtail bond purchases may be issued in August or September and will be officially announced later this year.