ECB First Major Central Bank To Raise Rates In Response To Iran War
The European Central Bank on Thursday became the first major central bank to raise interest rates in response to the Iran war as policymakers around the world including new U.S. Federal Reserve Chair Kevin Warsh wrestle with how to confront the inflation fed by sharply higher oil prices.The ECB’s rate-setting council raised its benchmark rate to 2.25% from 2%, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Fed, the Bank of Japan, and the Bank of England.
Oil prices have risen sharply due to Iran choking off the flow of crude oil through the Strait of Hormuz, the sea passage for a fifth of the world’s oil and fuel products during normal times. Raising rates aims to dampen the consumer price inflation fed by higher costs for products made from crude such as gasoline, diesel fuel, cooking gas and heating oil.
International benchmark Bent crude was trading at around $93 per barrel on Thursday, up from around $73 on the eve of the war. That has helped push inflation to 3.2% in May in the 21 countries that use the euro currency, above the ECB’s target of 2%.
But ECB policymakers must also consider the impact of higher borrowing costs on an economy showing only mediocre growth. That has led analysts to think Thursday’s hike will be a one and done affair, aimed mainly at signaling to financial markets that the bank is determined not to get behind the curve if inflation spirals higher.
AP
