ECB rate hike balances inflation and recession fears

Welcome to today’s Morning Brief, which examines the European Central Bank’s renewed interest rate hike, Draghi’s resignation in Italy, Russia’s goals in Ukraine and the energy dispute between the United States , Canada and Mexico.

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Welcome to today’s Morning Brief, which examines the European Central Bank’s renewed interest rate hike, Draghi’s resignation in Italy, Russia’s goals in Ukraine and the energy dispute between the United States , Canada and Mexico.

First, a note to readers: Morning Brief arrives free to your inbox every weekday morning, but our work is only made possible by the support we receive from FP subscribers. Consider becoming one today and unlock every FP item as well as insider perks.

If you would like to receive Morning Brief in your inbox every weekday, please sign up here.

European Central Bank (ECB) President Christine Lagarde is set to announce the bank’s first interest rate hike in 11 years today as Europe seeks to rein in rapid price inflation .

The increase, estimated at 0.25-0.5%, would still make ECB lending rates among the lowest in the world and keep the EU behind recent hikes by the US Federal Reserve. But coming at a time when the euro zone’s economic outlook is uncertain, the ECB’s intervention risks slowing already sluggish growth and triggering a recession.

The ECB has waited so long to raise rates because, unlike in the United States, European central bankers fear not a price-wage spiral – where prices rise to match rising wages – but the ripple effects the ever-increasing cost of energy, especially gas, driven by the war in Ukraine. Energy costs rose 42% in June compared to the same month last year according to EU statistics agency Eurostat, contributing to an inflation figure of 8.6% in the EU in June.

As Foreign Police‘s Christina Lu wrote earlier this month, the combination of high fuel prices and the threat of a gas cut from Russia is leading European policymakers to consider a nightmare energy scenario this winter.

So what can a central bank do about fuel prices? Not much, said Jacob Kirkegaard, senior fellow at the Peterson Institute for International Economics. Foreign Policebut it will still try.

“All they have is a big hammer. And you don’t necessarily want to sink the economy to try to lower energy prices. Because even if the European economy goes into a deep recession, maybe Vladimir Putin does not increase the energy supply during the winter and the prices do not fall. So the ECB is really in a corner, because the sources of inflation are not something they can really affect.

As well as trying to prevent a bloc-wide recession, EU leaders must also consider the differing economic performance of member states. A rise in borrowing costs is not as damaging for Germany as it could be for Italy, whose 150% debt-to-GDP ratio is second only to Greece among eurozone countries euro.

Preventing eurozone countries from suffering different effects from rising rates, a process known as fragmentation, will be one of Lagarde’s main challenges now and later in the year when further hikes are expected. Lagarde is set to unveil an anti-fragmentation program to help calm the markets, although details are still under wraps.

And while the US Federal Reserve’s rate hikes create ripple effects on the global financial system, the broader impact of the ECB’s decision will likely be much smaller in comparison, since relatively few countries hold a debt denominated in euros.

Erdogan’s incursion into Syria. Turkish President Recep Tayyip Erdogan said his plans for a military offensive in northern Syria remain on the table in comments carried by Turkish media following his summit with Russian President Vladimir Putin and Iranian President Ebrahim Raisi earlier this week. Erdogan also criticized US support for the Kurdish People’s Protection Units (known as the YPG), which Washington relies on in its anti-Islamic State operations.

“America has to go east of the Euphrates now. This is a result that came out of the Astana process,” Erdogan told reporters. “Turkey is also expecting this because it is America that feeds the terrorist groups there.”

Russia’s goals. On Wednesday, Russian Foreign Minister Sergei Lavrov gave rare insight into Russia’s overall plans for Ukraine in comments to state media. Lavrov said peace talks were currently impossible, but blamed the West rather than Ukraine for avoiding negotiations. Lavrov said Russian goals of territorial control had since March shifted beyond Donbass to include the regions of Kherson and Zaporizhzhia “and a number of other territories”. Lavrov added that the “geographical tasks” will expand further into Ukrainian territory as long as Western nations continue to supply long-range weapons.

The United States-Canada-Mexico standoff. The United States and Canada have requested talks with Mexico to resolve a dispute over Mexico’s plans to further nationalize its energy market, as the northern countries say they are violating the terms of the U.S.- Mexico-Canada (USMCA). Mexican President Andrés Manuel López Obrador ridiculed the challenge to his energy policy at a press conference on Wednesday, saying “nothing will happen”.

FP columnist Lynne O’Donnell returned to Afghanistan this week, nearly a year after it fell to the Taliban. From there, things went downhill quickly. As O’Donnell recounts in her final column, she endured “three days of cat and mouse with Taliban intelligence agents, who detained, abused and threatened me and forced me to publish a barely literate retraction. reports that they felt had broken their laws and offended Afghan culture. She has now left the country safely.

Read O’Donnell’s account here, then catch up on the reporting the Taliban would rather you didn’t see.