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ECB Raises Key Rates by 75 Basis Points to Tame Record Inflation

Economy Sep 08, 2022 08:15AM ET
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By Geoffrey Smith

Investing.com -- The European Central Bank raised its three official interest rates by 75 basis points each, its biggest ever single move in interest rates, and warned of more hikes to come, as it struggles to bring record high inflation back under control.

The Frankfurt-based central bank raised its key deposit rate, which provides the effective floor for money-market rates, to 0.75%, while the refinancing rate rose to 1.25% and the overnight lending rate to 1.50%.

"Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations," the ECB said in a statement detailing its decisions. "Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term."

The move is at the top end of expectations ahead of the Governing Council's meeting. Many analysts - including the bank's own chief economist Philip Lane, had warned that the Eurozone economy was facing an ever more likely recession due to the war in Ukraine and, to a lesser extent, the knock-on effects of pandemic-era stimulus.

All three rates still remain well below the current rate of inflation, which hit a new euro-era record of 9.1% in August.

In her regular press conference following the meeting, President Christine Lagarde said she expects the ECB to hike rates at "more than two but less than five" more meetings in the future, but left open the size of those rate moves. She stressed that steps of 75 basis points are "not the norm", but said she didn't know at what level the bank would be able to stop tightening.

The euro, which had been largely unchanged before those comments, fell around half a cent in their aftermath. Eurozone government bond yields, which are often a better indication of how the ECB's actions are received, rose as markets adjusted their medium-term forecast. However, benchmark 10-year yields rose largely in parallel with each other, avoiding the kind of spread-widening that signals increased stress in Eurozone financial markets.

"It clearly signals that #ECB seeks to re-establish its inflation fighting credentials after sticking for too long to the "temporary inflation" narrative," said Klaus Adam, economics professor at the University of Mannheim and a former ECB economist, said via Twitter, although he added that the ECB still needs "a few more of these" to bring its policy stance back to neutral.

The bank simultaneously updated its own forecasts for the next couple of years, and now sees inflation at 8.1% on average this year, up from a forecast of 6.8% in June. At the same time, it revised down its estimates for economic growth over the next two years, despite nudging up its forecast for the current year to 3.1% from 2.8% three months ago.

The ECB now expects the Eurozone economy to grow only 0.9% in 2023 before accelerating again to 1.9% as it returns to its pre-pandemic trend level. Despite that, Lagarde said the bank doesn't expect a recession, saying only that the economy will stagnate in the next six months.

Separately, the bank also ended a hangover from the period of negative interest rates. It said it will revert to paying banks a uniform rate on their reserves, which are largely parked in the deposit facility. It had previously allowed a portion of them to be remunerated at a higher level, reducing the penalty effect for holding excess liquidity.

ECB Raises Key Rates by 75 Basis Points to Tame Record Inflation
 

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Comments (17)
Megat Anwar
Megat Anwar Sep 09, 2022 2:32AM ET
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lol this witch is worst than putin
First Last
First Last Sep 08, 2022 1:27PM ET
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"chief economist Philip Lane, had warned that the Eurozone economy was facing an ever more likely recession due to the war in Ukraine" --  So EU is not in recession, and EU inflation is higher than US inflation.  So maybe Biden was right the US is not is a recession, definitely not officially, maybe not even unofficially.
Santosh Kumar
Santosh Kumar Sep 08, 2022 12:10PM ET
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Biden is a bin laden brother he going to revenge for laden death from America
First Last
First Last Sep 08, 2022 12:10PM ET
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Biden was VP when the US took him out.  He could've warned him (but didn't).
شردا كابور كابور
شردا كابور كابور Sep 08, 2022 10:37AM ET
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I want to understand
Krish Puthamber
Krish Puthamber Sep 08, 2022 9:28AM ET
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thanks Impressive
Ma Lu
Ma Lu Sep 08, 2022 9:19AM ET
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DAX is already dumping
Stefan Kunco
Stefan Kunco Sep 08, 2022 9:18AM ET
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Inflation, inflation, inflation,every day make fear for people. It is a good chain.
Andrew Sim
Andrew Sim Sep 08, 2022 9:12AM ET
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the market will still end in green 💚
Fred Berdach
Fred Berdach Sep 08, 2022 9:12AM ET
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Wishful thinking …nobody can tellMarket will
kelvin kevy
kelvin kevy Sep 08, 2022 9:12AM ET
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yes you are correct, but not anytime soon
Fred Berdach
Fred Berdach Sep 08, 2022 9:05AM ET
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Clueless central bankers are at the source of the problems .QE Magic money endless distribution and artificial pumping up of bubble wealth has come back to ****hard .
Pontas Silaen
Pontas Silaen Sep 08, 2022 9:02AM ET
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still moving try to find the place
 
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