The European Central Bank imposed another major rate hike on Thursday, as policymakers tried to quell the region’s record-high inflation.
The central bank, which sets monetary policy for the 19 countries that use the euro, raised interest rates by three-quarters of a percentage point, consistent with the previous increase last month. After a slow start in scaling – its july increase for the first time in more than a decade – the bank said it was quick to tighten its policy stance as inflation turned worse and more persistent than the bank expected.
Consumer prices rose by an average of 9.9% in the euro area in September from a year earlier, the fastest on record, driven by energy and food prices.
“Inflation remains excessively high and will remain above target for an extended period of time,” the bank said in a statement on Thursday.
The challenges facing central banks have increased over the past few months as lawmakers take more steps to protect households and businesses from rising prices. Central banks have warned that fiscal policy must not operate contrary to monetary policy. Britain has become an international example of this danger. Last week, Liz Truss resigns as prime minister after her tax cuts caused turmoil in financial markets.
European governments have disagreed about how they should respond to rising energy prices, with richer countries taking advantage of their better financial positions to spend more. Germany recently announced a €200 billion ($201 billion) aid plan for its households, businesses and industry.
The ability of central banks to control inflation has been rigorously tested over the past year. There used to be expectations that high inflation would pass quickly, especially when it was primarily driven by high energy prices and volatility that policymakers could not control. But economies have faced a series of economic shocks that have spurred central banks to act.
While inflation is well above the central bank’s 2% target, analysts have questioned how high-profile eurozone policymakers will be able to raise interest rates in a recession. outbreak.
The bank deposit rate, which banks receive when they deposit money in the central bank overnight, was increased to 1.5% on Thursday. This remains a relatively loose policy stance compared with the policy stance of central banks in many other countries. In the United States, the Federal Reserve’s policy rate target is between 3 and 3.25 percent. The Bank of England’s main policy rate is set at 2.25 percent.
Officials at the European Central Bank say they need to reach at least a neutral rate, where policy does not stimulate or limit economic growth, but estimates for that neutral rate are vary, and the central bank does not disclose its own estimates.
