European Central Bank raises interest rates by 75 basis points unprecedented | Business newsletter
The European Central Bank (ECB) raised its key interest rate by an unprecedented 75 basis points, signaling that further increases are likely.
On Thursday afternoon, the bank – the monetary policymaking body for the euro area and the European Union – raised the deposit rate from 0 to 0.75% and the main refinancing rate was raised. 1.25%, the highest level since 2011.
It comes at a time when inflation is at its highest level in half a century, and when the bloc is on the verge of a likely winter recession.
In a statement, the ECB said: “During the next several meetings, the Board of Governors is expected to raise interest rates further to reduce demand and guard against the risk of persistently rising inflation expectations.”
The bank has revised its economic forecast, forecasting inflation to average 8.1% this year, 5.5% in 2023 and 2.3% in 2024.
Inflation was initially driven by energy prices – exacerbated by Russiainvasion of Ukraine – but it’s also being driven by drought seen in recent months.
“Price pressures continue to increase and spread across the economy and inflation is likely to rise further in the near-term,” the ECB said.
“This important step accelerates the transition from current highly compatible policy rates to levels that will ensure a timely return of inflation to the ECB’s 2 percent medium-term target.”
Read more:
EU plans to limit Russian gas in retaliation for Ukraine war
Russia cancels plan to reopen main gas pipeline – deepening Europe’s difficulty in securing winter fuel
Ukrainians ‘regain 50 km’ near Kharkiv after surprise attack
The ECB had forecast GDP growth at 3.1% this year – up from the 2.8% forecast it made in June, but cut its 2023 forecast from 2.1% to 0. 9%.
‘Euro slip puts pressure on inflation’
Rob Clariry, investment strategist at Evelyn Partners, said: “While eurozone inflation has been largely driven by supply-side challenges rather than excessive demand, the ECB has acted decisively to avoid higher inflation expectations becoming entrenched.
“Another important reason is to try to stem the slide in the euro against the US dollar as this has added upward pressure on inflation.
Please use Chrome browser for more accessible video player
Bank of England Governor Andrew Bailey said it would take two years for inflation in the UK to drop to its target level of 2%.
“Basically, it looks like the ECB is taking the same stance as Bank of England and the Federal Reserve: addressing inflation at the expense of economic growth.
‘Positive things we can take away’
“While the economic outlook looks challenging, we can draw some positives.
“First, the euro area has made good progress in replenishing gas reserves before winter; whether this is sufficient depends on the ongoing flows and winter weather.
“Secondly, there seems to be a consensus emerging around the bloc that governments need to support households by subsidizing energy bills.
“Indeed, this week we saw Germany (65 billion euros), Portugal (2.4 billion euros) and the Netherlands (16 billion euros) announce support packages.
“This should boost consumer spending as the euro area looks to avoid a protracted economic slowdown.”
In currency trading, the euro initially rose above parity against the dollar, but has since weakened. The pound hit a two-and-a-half-month low of 86.95 pence/euro early in the day before recovering slightly.
