European Central Bank lifts rates for first time in 11 years

INFLATION VS RECESSION

The ECB’s 50 basis point hike on Thursday still leaves it lagging its global peers, particularly the US Federal Reserve, which lifted rates by 75 basis points last month and is likely to move by a similar margin in July.

But the euro zone is more exposed to the war in Ukraine and a threatened cut off in gas supplies from Russia could tip the bloc into recession, leaving policymakers with a dilemma of balancing growth and inflation considerations.
 
Confidence has already taken a hit from the war, and high raw materials prices are depleting purchasing power.
 
Raising borrowing costs in a downturn is controversial, however, and could magnify the pain for businesses and households.
 
But the ECB’s ultimate mandate is controlling inflation, and rapid price growth for too long could perpetuate the problem as firms automatically adjust prices.
 
Europe’s labour market is also increasingly tight, suggesting that pressure from wages is also likely to keep price growth high.
 
Some central banks, most particularly the Fed, have made clear they are willing to crash growth to control inflation because the risk of a new “inflation regime” setting in is too high.

And if a recession is coming, the ECB needs to front-load rate hikes so that its tightening cycle is finished sooner.