The bank’s board raised its key benchmarks by an unprecedented three-quarters of a percentage point for the 19 countries that use the euro currency. The ECB usually moves interest rates by a quarter of a point and had not raised its key bank lending rate by three quarters of a point since the launch of the euro in 1999. Bank President Christine Lagarde said the ECB would keep interest rates on hold “over the coming meetings” because “inflation remains very high and is likely to remain above our target for a long time.” Lagarde stopped short of forecasting a recession, although many economists predict a recession at the end of the year and into early 2023 as high energy and food prices reduce people’s spending power. The bank’s assumption is that economic output will not fall completely but will “stagnate” later this year and early next, he said. The bank’s jumbo hike is aimed at raising the cost of borrowing for consumers, governments and businesses, which in theory slows spending and investment and reduces rising consumer prices by reducing demand for goods. Analysts say it is also aimed at boosting the bank’s credibility after it underestimated how long and how severe this burst of inflation would be. After reaching a record 9.1 percent in August, inflation may rise to double digits in the coming months, economists say. The war in Ukraine has fueled inflation in Europe, with Russia sharply cutting supplies of cheap natural gas used to heat homes, generate electricity and run factories. This has increased gas prices by 10 times or more. European officials denounce the cuts as blackmail aimed at pressuring and dividing the European Union over its support for Ukraine. Russia blamed technical problems and threatened this week to cut off energy supplies entirely if the West imposed planned price caps on Moscow’s natural gas and oil. The ECB lags behind other central banks in raising interest rates. Central banks around the world have scrambled after inflation fueled by the war in Ukraine and the lingering effects of the COVID-19 pandemic drove energy prices higher and squeezed supplies of parts and raw materials. The sudden campaign to raise interest rates follows years in which borrowing costs and inflation have remained low due to broad trends such as globalisation, population aging and digitalisation. Lagarde dismissed the comparisons, saying “we are not trying to imitate any other central bank” and pointing out that the ECB began tightening monetary policy in December when it decided to phase out pandemic stimulus through bond purchases. Some economists say the ECB’s rate hikes, including a half-point increase at its last meeting in July, could deepen a European recession forecast for the end of this year and early 2023, caused by higher inflation that has made everything from groceries to utility bills more expensive. Lagarde said a 2022-23 recession would only occur in a “really dark” worst-case scenario where all Russian gas is cut off, alternative supplies are unavailable and governments have to resort to energy restraint. He praised the EU executive’s efforts to contain energy prices, such as by regulating the electricity market, and noted that while the rate hikes send “a strong signal” of the bank’s commitment to fighting inflation, “it does not I can lower the price of energy.” But the bank has argued that rate rises will prevent higher prices from setting expectations for wage and price deals and that decisive action now will prevent the need for even bigger rises if inflation takes hold. Europe’s central bank “wants to fight inflation — and wants to be seen as fighting inflation,” said Holger Schmiding, chief economist at Berenberg Bank. But energy prices and government support programs to protect consumers from pain will “have a much bigger impact on inflation and the depth of the coming recession than monetary policy,” he said. Interest rate hikes often support a currency’s exchange rate — but the euro is under pressure from broader fears about recession and economic growth. It recently fell below $1, a 20-year low. The euro fell about half a cent after the ECB’s decision, to around 99.5 US cents. The ECB 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 benchmark is 1.75% and the Bank of Canada raised rates on Wednesday by three-quarters of a point to 3.25%.
