FRANKFURT: The European Central Bank (ECB) announced the largest interest rate increase in its history on Thursday and said there were more to come as it scrambles to pull inflation down from record heights.
Policymakers lifted the ECB’s key rates by 75 basis points, a leap matched only by a technical move made in 1999 shortly after the founding of the regional central bank.
Euro zone inflation hit a record 9.1% in August, as steep increases in the price of energy in the wake of the Russian invasion of Ukraine heaped pressure on households and businesses.
Consumer prices were likely to continue to rise quickly “for an extended period”, the ECB said in a statement, with its latest forecasts expecting inflation to average 8.1% in 2022.
The “major step” quickened the ECB’s move away from a “highly accommodative level of policy rates” to one that would bring inflation back to its two-percent target, it said.
The Frankfurt-based institution was on a “journey” to raise interest rates and tame inflation, ECB President Christine Lagarde said at a news conference.
The ECB already exceeded expectations at its July meeting with a 50-basis-point increase in rates, its first in more than a decade.
Thursday’s drastic increase was not the end of the ECB’s work, however, with the central bank saying it “expects to raise interest rates further” at its next meetings.
The ECB had “given up on inflation targeting and forecasting and has joined the group of central banks focusing on bringing down actual inflation”, said Carsten Brzeski, head of macro analysis at the Dutch bank ING.
‘Serious’
Ahead of the meeting, a growing chorus of voices called for the central bank to show greater “determination” in the face of inflation.
Thursday’s gathering marked the beginning of a new “meeting-by-meeting” approach for the ECB.
In July, policymakers scrapped so-called forward guidance, which had limited the ECB’s room for manoeuvre, giving them a free hand for more aggressive hikes.
The ECB is playing catch-up with central banks in the United States and Britain, which started raising rates harder and faster in response to inflation.
The 75-basis-point increase matches the largest step taken by the Federal Reserve in its current hiking cycle.
The bumper hike was not “the norm”, Lagarde said, but the governing council had been “unanimous” in their support for the move.
The ECB was still “so far away” from interest rates that would bring inflation back to its two-percent target, she said, with more hikes to come.
“We want all economic actors to understand that the ECB is serious about returning inflation back to two percent,” Lagarde said.
Growth struggles
In an updated set of economic forecasts, the ECB said it expected inflation to fall back to 5.5% in 2023 and 2.3% in 2024.
The central bank also slashed its forecast for economic growth in 2023 to 0.9%, from its previous prediction of 2.1%.
Recent gloomy economic data meant the euro zone was “expected to stagnate later in the year and in the first quarter of 2023”, the ECB said.
“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,” said the bank.
The war in Ukraine was also still weighing on the confidence of businesses and consumers, it added.
The euro zone risked slipping into a recession in 2023 in a “downside” scenario that included the full cut off of Russian gas supplies, Lagarde said.
Repeated upward revisions to the inflation forecast have drawn criticism of the ECB’s economic models.
“I take the blame,” Lagarde said of the prediction errors, but stressed that “all the international institutions” had been caught out by the surge.
