As a liquidity crisis is rapidly worsening, the European Central Bank raised the interest rate by 75 basis points, the largest single increase in its history. This sounds like a contradiction, but it is not. With Eurozone inflation at 8.9% in July, ECB rates — now at 1.25% — are in reality at minus 6.7%. If you consider that when inflation was flat and ECB rates were negative, current rates represent de facto a monetary expansion.
We do not commend the new ECB inflation prognoses, because they have been regularly wrong. But the rates hike had been already priced-in by the markets, which in fact did not react to the decision. What the ECB is facing now is a liquidity squeeze typical of all recent systemic crises, this time hitting energy utilities, which are hit by a wave of margin calls due to their over indebtedness.
