Breaking News
Investing Pro 0
Black Friday SALE: Up to 54% OFF InvestingPro+ CLAIM OFFER

ECB promises more rate hikes after unprecedented increase

Economy Sep 08, 2022 16:34
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: President of European Central Bank (ECB) Christine Lagarde speaks during a news conference following the ECB's monetary policy meeting, in Frankfurt, Germany, July 21, 2022. REUTERS/Wolfgang Rattay/File Photo
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) - The European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and promised further hikes, prioritising the fight against inflation even as the bloc is likely heading towards a winter recession and gas rationing.

With inflation at a half-century high and approaching double-digit territory, policymakers are worried that rapid price growth is getting entrenched, melting away household savings, thwarting investment and setting off a hard-to-break wage-price spiral.

Following up on a large July rate hike, the ECB raised its deposit rate to 0.75% from zero and lifted its main refinancing rate to 1.25%, the highest level for both since 2011, with moves promised for the next several meetings.

Still, the ECB is trailing many of its peers, particularly the U.S. Federal Reserve, in raising interest rates and some analysts see the oversized steps since July as an attempt to catch up.

"We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period," ECB chief Christine Lagarde said, adding that Thursday's decision was unanimous.

"We think it will take several meetings," she said. "How many is several? It’s probably more than two, including this one, but it’s probably also going to be less than five," Lagarde said, suggesting that rate hikes could continue into early 2023.

GRAPHICS:ECB monetary policy:

Policymakers had for weeks oscillated between a 50 and a 75 basis-point increase, but another jump in both headline and underlying inflation likely settled 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 declined to rule out a similarly large move in the future.

"We continue to expect it to raise its deposit rate to 1.75% by the beginning of next year, but to pause the rate hike process after that because of the recession that will then be visible," Commerzbank (ETR:CBKG) economist Jörg Krämer said.

"To put a lasting brake on inflation, the ECB would even have to go beyond that, because inflation is massively above its target," Krämer added.

GRAPHIC: Central banks ramp up flight against inflation

Inflation jumped to 9.1% in August and the ECB's new projections predict a peak near this level just before the end of the year, even if some market analysts see it over 10% soon.

Still, these projections put price growth over the bank's 2% target for years to come with the 2023 projection raised to 5.5%from 3.5% and 2024 seen at 2.3%, above the 2% target.

Markets, which saw Thursday's move as very likely, now price a little more than a 50 basis-point interest rate increase for October and a similar hike in December.

"Where we are is not the neutral rate," Lagarde said. "We are heading in that direction. It takes frontloading. It will take further hikes in the next several meetings."

The ECB's growth projections, sharply cut for next year, expect economic stagnation over the winter months but many of the potential downside risks, particularly the loss of Russian gas, has already materialised.

GRAPHIC: The race to raise rates

"We see today's decision in favour of the larger 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 costs in terms of lower growth to ensure price stability," Morgan Stanley (NYSE:MS) said in a note.

In the ECB's baseline scenario, the economy would expand by 0.9% next year while in the downside, it could shrink by 0.9%.

This downside scenario would, however, push inflation even higher, to 2.7% in 2024 as the drag from an economic downturn would be far outweighed by persistently high natural gas prices.

The euro's weakness may have also been a consideration on Thursday.

The euro has been languishing around parity against the dollar for weeks and its sharp fall to two-decade lows this year adds to import costs and raises inflation.

Lagarde added that while running down its oversized balance sheet, as done by some of its peers, could be on the agenda at one point, it is for now concentrating on interest rates as an instrument.

ECB promises more rate hikes after unprecedented increase

Related Articles

Take Five: Everything to play for
Take Five: Everything to play for By Reuters - Nov 25, 2022 2

LONDON (Reuters) - The final month of the year is almost here but there's no time yet to slow down, with latest U.S. jobs numbers and euro zone inflation data coming up. And don't...

Dollar edges up in range-bound holiday markets
Dollar edges up in range-bound holiday markets By Reuters - Nov 25, 2022 3

By Saqib Iqbal Ahmed NEW YORK (Reuters) - The dollar edged higher across the board on Friday in a quiet session following the U.S. Thanksgiving holiday but remained near...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email