ECB raises rates by unprecedented 75 basis points

Published Thu, Sep 8, 2022 · 08:34 PM

The European Central Bank (ECB) raised interest rates by an unprecedented 75 basis points on Thursday (Sep 8) to tame runaway inflation, even as a recession is now increasingly likely as the bloc has lost access to vital Russian natural gas.

The ECB lifted its deposit rate to 0.75 per cent from 0, and raised the main refinancing rate to 1.25 per cent – their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.

“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.

The move comes after weeks of canvassing by policymakers, with a seeming majority making the case for a 75 basis point hike and a few policy doves trying to downgrade expectations.

Markets, however, sided with the conservatives and priced in an 80 per cent likelihood of a 75 basis point move, even as economists polled by Reuters were more evenly split, showing only a slight majority expecting the larger move.

The large hike comes as the ECB increased its own inflation forecasts and continues to see price growth well above its 2 per cent target throughout its entire projection horizon.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

VIEW ALL

“ECB staff have significantly revised up their inflation projections; and inflation is now expected to average 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024,” the ECB added.

Conservatives feared that anything but an oversized move would signal that the ECB was not serious about its inflation-fighting mandate. That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB.

Timid action would have also weakened the euro, boosting inflation through more expensive energy imports.

Frontloading the rate hikes also allows the ECB to get most of the work done before the recession sets in. Reuters

KEYWORDS IN THIS ARTICLE

READ MORE

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to  t.me/BizTimes

International

SUPPORT SOUTH-EAST ASIA'S LEADING FINANCIAL DAILY

Get the latest coverage and full access to all BT premium content.

SUBSCRIBE NOW

Browse corporate subscription here