The European Central Bank hiked its key interest rate by an unprecedented 0.75% on Thursday, prioritizing the fight against inflation even as the bloc’s economy may be headed for a winter recession. suggested a further increase.

With inflation approaching a half-century high and nearing double digits, policymakers fear that rapid inflation will take hold, household savings will lose value, and a wage-price spiral that will be difficult to break will begin. I am afraid that

Following the rate hike in July, the ECB raised the deposit rate from zero to 0.75% and raised the main refinancing rate to 1.25%, the highest level since 2011.

“This major step will accelerate the transition from the current very accommodative policy rate level to a level that guarantees a timely return of inflation to the ECB’s medium-term target of 2%,” the ECB said in a statement. It is.”

Policy makers have oscillated between 50 basis points and 75 basis points of gains for several weeks, but headline inflation is likely to rise as the numbers show inflation is now permeating the broader economy. The debate seems to have settled with both inflation and underlying inflation rising again. eradicate.

Indeed, the ECB has raised its inflation forecasts again, raising the 2023 outlook to 5.5% from 3.5% and setting the 2024 interest rate to 2.3%, above its 2% target.

Despite the front-loading, the ECB said further rate hikes were likely.

Entering the meeting, conservatives feared that anything other than an unusual move would show that the ECB officially wasn’t serious about its sole purpose of fighting inflation. .

This risks further pushing up already high long-term inflation expectations, signaling a loss of confidence in the ECB and potentially calling into question banks’ framework for inflation targeting.

fear of recession

The cowardly action also weakened the euro and risked pushing up inflation further through more expensive energy imports.

The euro has languished roughly on par with the dollar for several weeks, not far from its 20-year low earlier this month.

This means that exports of everything from oil to automobiles will become more expensive, raising prices for consumers.

Policymakers have also moved forward, partly to send a strong signal about the central bank’s commitment to fighting inflation and partly to end most rate hikes before the onset of the recession becomes apparent. claims a rate hike.

A recession is inherently inevitable as high energy prices reduce purchasing power.

However, monetary policy is largely helpless against recessions caused by supply shocks, providing a reason to support rate hikes even when the economy suffers.

Some policymakers are now talking openly about the recession. The ECB’s new projections also point to a significant slowdown in growth over the next few years.

Still, a shallow recession might even be beneficial, as the bloc’s labor market is getting tighter and a recession could bring relief to companies currently struggling to find workers. Some argue that

The bank expects the eurozone economy to expand by 3.1% this year and 0.9% in 2023.

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