The European Central Bank (ECB) has followed the U.S. Federal Reserve (Fed) and other central banks in aiming to curb record inflation that is weighing on consumers and pushing Europe into recession. It was the largest interest rate hike in history, following rapid rate hikes around the world.
The bank’s 25-member board has lifted key benchmarks by an unprecedented three-fourths percentage point in 19 countries using the euro currency.
The ECB typically moves rates by a quarter of a percentage point and has not raised lending rates for major banks by three-quarters of a percentage point since the introduction of the euro in 1999.
Watch the ECB press conference live: President Christine @lagarde We explain today’s monetary policy decisions https://t.co/zHekkS3NWz
— European Central Bank (@ecb) September 8, 2022
Central bank governor Christine Lagarde said the ECB would raise interest rates “in the next few meetings” because inflation “is likely to remain above our target for a long period of time”. At its July meeting, the Fed passed a rate hike of 0.5 percentage points, marking the first interest rate hike in 11 years.
However, it said the economy was “expected to slow significantly over the remainder of the year”, adding that energy prices would remain “abnormally high”.
The bank said it expected further rate hikes because “inflation could rise further in the short term” and that the economy was expected to “stagnate by the end of the year.”
The move follows a 0.5 percentage point rate hike at the ECB’s last meeting in July, the first rate hike in 11 years.
The huge increase is aimed at raising the cost of borrowing for consumers, governments and businesses, theoretically slowing spending and investment and reducing demand for commodities, thus easing inflation. will be
Analysts said it was also aimed at boosting the bank’s credibility after underestimating how long and how severe this inflation outbreak could be.
christine president @lagarde Introducing the Eurozone Inflation Outlook pic.twitter.com/AknbroueNT
— European Central Bank (@ecb) September 8, 2022
After reaching a record high of 9.1% in August, economists suggest inflation could rise to double digits in the coming months.
The war in Ukraine has sped up inflation in Europe, and Russia has slashed supplies of cheap natural gas used to heat homes, generate electricity and run factories. This caused gas prices to jump more than 10 times her.
European officials have accused the cuts of blackmail aimed at pressuring and dividing the European Union over its support for Ukraine. It threatened this week to completely cut off energy supplies if it plans to cap prices on natural gas and oil.
Economists say ECB rate hikes could exacerbate the European recession projected for the end of this year and early 2023.
Energy prices are beyond the ECB’s control, but rate hikes could prevent the ECB from embedding higher prices into wages and price trading expectations, reducing the need for larger price hikes if inflation takes hold. I believe we can prevent this from happening.
Holger Schmieding, chief economist at Berenberg Bank, said the European Central Bank “want to fight inflation and wants to fight inflation”.
christine president @lagarde Introducing the economic growth outlook for the Eurozone pic.twitter.com/vgEYLwk2V6
— European Central Bank (@ecb) September 8, 2022
Energy prices and government support programs to shield consumers from some pain “have a far greater impact on inflation and the depth of a looming recession than monetary policy,” he added.
Higher interest rates could help fight inflation by boosting the euro’s exchange rate against the dollar and other currencies.
This is because the recent depreciation of the euro below $1 (due to higher energy costs and weaker economic prospects) has made imports, including energy, more expensive.
The ECB lags other global central banks in raising rates. Central banks around the world have been tripped up by inflation caused by Russia’s war in Ukraine and the lingering impact of the Covid-19 pandemic, which has pushed up energy prices and restricted supplies of parts and raw materials. After that, I hurried away.
A sudden interest rate hike campaign followed a year when borrowing costs and inflation remained low due to widespread trends such as globalization, aging populations and digitalisation.
The ECB’s benchmark is currently 1.25% of lending to banks. The Fed’s main benchmark is 2.25-2.5% after several big rate hikes, including two of 3/4 points. The Bank of England’s key benchmark is 1.75%, while the Bank of Canada increased its benchmark by three-quarters of a point to 3.25% on Wednesday.
