Interview: Fear of recession tying hands of ECB in matching U.S. interest rate hikes, economist says

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ROME, Oct. 1 (Xinhua) -- European economies are groaning under the pressure of rising interest rates from the U.S. Federal Reserve, as the European Central Bank (ECB) can do little in the short term to neutralize the impacts of the Fed hikes, an Italian economist has said.

Compared with frequent U.S. moves this year, the ECB has been "more timid" in increasing rates, Guido Traficante, an economist at the European University of Rome, told Xinhua recently.

On Sept. 21, the Fed increased its benchmark interest rate by 75 basis points -- the fifth hike since March -- raising the target range for the federal funds rate to 3 to 3.25 percent with a cumulative rise of 300 basis points.

"We can see a flow of capital toward the U.S. because of these higher interest rates," Traficante said.

The consecutive rate hikes have been eroding the value of the euro. Earlier this week, the U.S. dollar reached a new high against the euro, though falling a little then. As of Friday, the dollar was worth 1.02 euros, far stronger than it was at the start of the year.

Bond yields have been higher across the European Union, increasing borrowing costs for European governments. The trend is especially pronounced in Italy which is in a period of political power change and whose economy is highly indebted.

The spread between Italian bonds and those in Germany, Europe's largest economy, surpassed 250 basis points this week. The spread, which measures the difference in bond yields between the two countries, has swollen by nearly 100 basis points over the last six months.

Besides the weaker euro and higher bond yields, Traficante noted that the European inflation, which hit a euro-era high of 9.1 percent in August, is also an indicator partially attributable to higher interest rates in the United States.

The ECB "also started its own restrictive monetary policy, as well as other central banks in Europe such as in Great Britain," he said. "But the end result is an increase in the costs for commodities, which are priced in dollars, and which became more expensive for European countries."

To rein in the high inflation, the ECB has raised rates twice by a total of 125 basis points this year. The current ECB deposit facility interest rate stands at 0.75 percent.

But there is little that the ECB can do to combat the Fed impacts in the short term, said Traficante.

Due to the fragility of European economies, the ECB cannot raise interest rates in step with the Fed, he said, noting that Europe is feeling more impacts from the Ukraine crisis than the United States, which is farther away and more autonomous in terms of energy supplies and economic activity.

"In the U.S., the overall economy is doing well, but we don't have the same situation in the euro currency zone," Traficante said. "Unemployment is higher, and the forecast points out that there will be a recession. This makes the task of the European Central Bank much harder."

Media reports say more U.S. interest rate increases are expected.

For Europe, the responsibility for softening the blows from the macroeconomic trends would have to come from policy initiatives, said Traficante. Enditem

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