The move, which corresponds to the ECB’s biggest previous increase in borrowing costs, raises the bank’s key deposit rate from zero to 0.75 percent – the highest level since 2011. Christine Lagarde, president of the ECB, said that while moves on this scale were not “the norm”, today’s rise would be followed by further hikes in the coming months to bring inflation, now at a high of 9, under control. 1%. The decision to raise interest rates by 75 basis points was unanimous, he added. The euro lost 0.5 percent against the dollar, trading at $0.994 against the greenback as Lagarde spoke to the press. The common currency had initially moved between small gains and losses after the central bank announced a rate hike. Europe’s regional Stoxx 600 share index lost 0.8%. It is the second consecutive increase in borrowing costs by the ECB, which raised interest rates in July for the first time in more than a decade. The rise comes despite growing fears that the currency zone will slip into recession in the coming months as rising energy prices – mainly a result of Russia cutting key European gas supplies – hit businesses and households across the region. However, inflation is well above the ECB’s 2 percent target, while the unemployment rate is at a record low of 6.6 percent in July. The euro is also trading at 20-year lows against the dollar, pushing up the price of imports. Such developments have strengthened the ECB’s view to take more aggressive action to curb inflation, even if it costs jobs and growth. The last time the ECB raised interest rates by 0.75 percentage points was a three-week technical adjustment to smooth the circulation of the euro in January 1999. The ECB announced that the key bank liquidity refinancing rate will increase from 0.5% to 1.25%. The marginal funding facility rate for overnight loans to banks will rise from 0.75 percent to 1.5 percent. In government bond markets, the yield on the two-year German bond — which is sensitive to changes in interest rate expectations — rose 0.16 percentage points to 1.25% as the price of the debt edged lower. The yield on the 10-year bond, seen as a proxy for borrowing costs across the eurozone, rose 0.11 percentage points to 1.68%. Italian bond prices also fell, with the two-year yield adding 0.13 percentage points to 2.27 percent and the 10-year yield adding 0.12 percentage points to 3.98 percent. The ECB has lagged behind most major central banks in its response to high inflation. The Federal Reserve is widely expected to announce a third consecutive 75bp hike at its meeting this month, which would raise the federal funds rate to a target range of 3% to 3.25%. “The ECB has joined the 75 basis point club,” said Seema Shah, chief global strategist at Principal Global Investors, adding that the move was “proof of the huge inflation challenge facing the central bank.” The ECB also unveiled new forecasts that showed a serious deterioration in the growth outlook and much higher inflation expectations compared to its forecast in June. Growth will slow from 3.1 percent this year to 0.9 percent next year and 1.9 percent in 2024, it said. That was a marked reduction from its previous forecast of a modest slowdown in growth from 2.8 percent this year to 2.1 percent over the next two years. “Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity,” the ECB said.

However, unlike many economists, the bank does not expect a recession – two consecutive quarters of falling output – instead predicting that the economy will “stagnate later in the year and the first quarter of 2023”. The central bank raised its inflation forecast for this year from 6.8 percent to 8.1 percent and for next year from 3.5 percent to 5.5 percent. Its inflation forecast for 2024 rose from 2.1 percent to 2.3 percent. Underscoring the deteriorating economic outlook for the eurozone’s largest economy, the Kiel Institute for the World Economy cut its forecast for German growth next year by 4 percentage points to minus 0.7% on Thursday, warning: “With high energy import prices, The economic avalanche is rolling towards Germany’. So far the hard data on the eurozone economy so far this summer has remained surprisingly resilient. Growth rose by an unexpectedly strong 0.8% in the second quarter, bolstering the case for the ECB’s hawkish policymakers pushing for more “aggressive” interest rate action.