ECB Rate Hike 0.75% to Fight with Inflation

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 refinance rate 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.

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.

“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.

The euro will be boosted and investors are advised to focus on the upside momentum of the euro.

 

Analyst: Mr. Chhea ChhayHeng, Independent Analyst

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