Brushing aside concerns that higher interest rates would add to the current squeeze on consumer disposable income and deepen a looming recession, the central bank’s 25-member governing board raised its key benchmarks by an unprecedented 0.75 of a percentage point in 1.25%. The move follows a similar hike by the US Federal Reserve and is expected to put pressure on the Bank of England to follow suit when its policymakers meet next week to review UK monetary policy. The ECB announced its first rate hike in 11 years at its previous meeting in July, raising rates by half a point. Its benchmark is now 1.25% for lending to banks. The Fed’s main benchmark is 2.25% to 2.5% after several big rate hikes, including two of three quarters of a point. The Bank of England’s key benchmark is 1.75%. Rising inflation in the eurozone, which hit a record 9.1% last month amid soaring gas prices, has forced the ECB to tear up its usual rulebook for gradual hikes. Christine Lagarde, the president of the ECB, has indicated that the central bank is ready to announce further rate hikes to tackle high inflation and lower its 2% target. “We have a goal, we have a mission. We have incredibly high inflation numbers, we are not on target in our forecasts and we need to take action,” he said. “What we do know is that we want to achieve that medium-term target of 2% and we will take the necessary steps along the way to get there. We think it will take several meetings to get there.” Altaf Kassam, head of European investment strategy at State Street Global Advisors, said the increase was “inevitable” after a surprise rise in the headline inflation rate in August. Price inflation eased in France to 5.8% from 6.1% in July, but rose in most other eurozone countries. “The ECB had to respond strongly to criticism that it was behind the curve, especially with concerns that spillover effects were beginning to take hold,” he said. “This rise was also intended to put a floor under the euro and keep a lid on the extra imported inflation that its weakness had brought.” Concerns that workers would push for anti-inflation pay rises proved largely unfounded, but central bank officials said they were worried that without a decisive response to rising inflation, unions would make higher wage demands in the coming months. The euro has weakened in recent months to match the dollar, raising the cost of imports and adding to pressure for broader price increases. Willem Sels, the global head of investment at private bank HSBC, said the ECB is divided over the decision when higher interest rates would make it harder for businesses to pay the interest costs of debt and invest in new ventures, deepening the recession. “The ECB and other central banks have been torn between the need to crush inflation and their realization that recessionary risks continue to rise. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. “So markets were uncertain whether the ECB would hike by 0.5% or 0.75%. By opting for 0.75%, the ECB went with the more hawkish option, consistent with the most hawkish tone central banks have sent since the central bankers’ meeting in Jackson Hole in late August.” A gathering of central bank governors in Jackson Hole, Wyoming last month was marked by pledges to tackle inflationary pressures despite forecasts of a recession. US Fed chief Jerome Powell said the Fed’s “main focus right now is to bring inflation back down”, adding that the Fed will continue to use its tools “brutally” until rates are under control . “We have to maintain it until the job is done,” he said. Some skeptics have accused the ECB of overreacting despite lagging behind major central banks. “There is a big risk that this decisive approach by the ECB will not only lead to lower growth and employment than now, but lower than needed to moderate inflation,” wrote Erik F Nielsen, the group’s chief economic adviser. at UniCredit Bank. “Growing concern about their reputation could lead the ECB and possibly the Fed to over-tighten,” he added. “We still struggle to see how aggressive rate hikes can reduce headline inflation in the eurozone,” said Carsten Brzeski, chief eurozone economist at ING bank. “The economy is far from overheating and will almost inevitably fall into a winter recession, even without further rate hikes.”
