Raises deposit rate to 0.75% from zero Eurozone inflation is uncomfortably high and rising The ECB’s new forecasts show higher inflation and lower growth More rate hikes are on the cards A declining growth scenario has already materialized
FRANKFURT, Sept 8 (Reuters) – The European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and promised further hikes, prioritizing fighting inflation even as the bloc likely heads for a winter recession and tightening of natural gas. With inflation at a half-century high and nearing double-digit territory, policymakers worry that rapid price increases are taking hold, eroding household savings, stifling investment and triggering a difficult wage-price spiral. Following July’s big rate hike, the ECB raised its deposit rate to 0.75% from zero and raised its key refinancing rate to 1.25%, the highest level for both since 2011, with promises of moves for the next meetings. Sign up now for FREE unlimited access to Reuters.comSign up However, the ECB trails many of its peers, particularly the US Federal Reserve, in raising interest rates and some analysts see the outsized steps since July as an attempt to catch up. “We expect to raise interest rates further because inflation remains very high and is likely to remain above our target for a long time,” ECB chief Christine Lagarde said, adding that Thursday’s decision was unanimous. “We think it will take several meetings,” he said. “How much is a lot? It’s probably more than two, including this one, but it will probably also be less than five,” Lagarde said, suggesting rate hikes could continue into early 2023. Reuters Graphics Policymakers had for weeks wavered between a 50- and 75-basis-point hike, but another jump in both headline and core inflation likely eased the debate with Lagarde repeatedly arguing that the current high level was simply unacceptable. When asked about future moves, Lagarde said 75 basis points is not the norm and future moves could be smaller, but she also refused to rule out a similarly large move in the future. “We continue to expect that it will raise the deposit rate to 1.75% by the beginning of next year, but will stop the rate hike process after that because of the recession that will be visible,” Commerzbank economist Jörg Krämer said. “To put a lasting brake on inflation, the ECB would even have to go beyond that, because inflation is well above its target,” Cramer added. Reuters Graphics Signage is seen outside the European Central Bank (ECB) building, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay read more Inflation jumped to 9.1% in August and new ECB forecasts see a peak near that level shortly before the end of the year, even if some market analysts see it above 10% soon. However, these forecasts put price growth above the bank’s 2% target for the coming years, with the 2023 projection rising to 5.5% from 3.5% and 2024 seen at 2.3 %, above the target of 2%. Markets, which saw Thursday’s move as highly likely, are now pricing in little more than a 50 basis point rate hike in October and a similar hike in December. “Where we are is not the neutral rate,” Lagarde said. “We’re moving in that direction. It needs an advance. Further increases will be needed over the next several meetings.” The ECB’s sharply cut growth forecasts for next year expect economic stagnation in the winter months, but many of the potential downside risks, particularly the loss of Russian gas, have already materialized. Reuters Graphics “We see today’s decision in favor of a bigger step as a signal to markets that the central bank is serious about regaining its inflation-fighting credentials and that it is willing to accept the cost of lower growth to ensure stability of prices,” Morgan Stanley said. he said in a note. In the ECB’s baseline scenario, the economy would grow by 0.9% next year, while on the downside, it could contract by 0.9%. This bearish scenario, however, would push inflation even higher to 2.7% in 2024, as the drag from an economic downturn would be largely offset by persistently high gas prices. Euro weakness may also have been an issue on Thursday. The euro has languished around parity against the dollar for weeks, and its sharp fall to two-decade lows this year is raising import costs and raising inflation. Lagarde added that while running down her oversized balance sheet, as has been done by some of her peers, could be on the agenda at some point, for now she is focusing on interest rates as a tool. Sign up now for FREE unlimited access to Reuters.comSign up Reporting by Balazs Koranyi and Francesco Canepa. Editor: Hugh Lawson Our Standards: The Thomson Reuters Trust Principles.
