The European Central Bank has raised interest rates across the euro zone by a record margin to combat rising inflation that has reached double figures in some of the currency bloc’s 19 countries.
Brushing aside concerns that higher rates would add to the current squeeze on consumer disposable incomes and increase the depth of a looming recession, the central bank’s 25-member governing council raised its key benchmarks by an unprecedented 0.75 percentage point to 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 bank loans. The Fed’s main benchmark is 2.25% to 2.5% after several major rate hikes, including two by 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 rising natural gas prices, has forced the ECB to break its usual rule of incremental hikes.
Christine Lagarde, president of the ECB, indicated that the central bank was ready to announce further rate hikes to tackle high inflation and reduce it to its 2% target.
“We have a goal, we have a mission. We have incredibly high inflation numbers, we are not on target with our forecasts and we need to take action,” he said.
“What we know is that we want to achieve this 2% goal in the medium term and we will take the necessary steps on the way to get there. We think it will take several meetings to get there.”
Altaf Kassam, the head of European investment strategy at State Street Global Advisors, said the increase was “inevitable” after a surprise jump in the headline inflation rate in August.
Price growth eased in France to 5.8% from 6.1% in July, but rose in most other eurozone countries.
“The ECB had to respond forcefully to criticism of falling behind the curve, particularly with concerns that second-round effects were starting to take hold,” he said.
“This hike was also about putting a floor under the euro and keeping a lid on the additional imported inflation that its weakness had caused.”
Concerns that workers would push for higher wages to reduce inflation have proved largely unfounded, but central bank officials have said they worry that without a decisive response to rising inflation, unions will present higher wage claims in the coming months.
The euro has fallen in recent months to parity with the dollar, raising the cost of imports and increasing pressure on broader price growth.
Willem Sels, the global chief investment officer at HSBC’s private bank, said the ECB was torn over the decision as to when higher interest rates would make it harder for companies to pay the interest costs of debt and invest in new companies, deepening the recession.
“The ECB and other central banks have been torn between the need to crush inflation and the awareness that recession risks continue to rise.
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“So markets were not sure whether the ECB would raise 0.5% or 0.75%. By opting for 0.75%, the ECB opted for the more falsified option, in line with the more fake that central banks have been sending since the Jackson Hole meeting of central bankers at the end of August.”
The meeting of central bank governors in Jackson Hole, Wyoming, last month was marked by commitments to address inflationary pressures despite forecasts of a recession.
US Fed chief Jerome Powell said the Fed’s “general focus right now is to reduce inflation”, adding that the Fed will continue to use its tools “strongly” until prices are under control.
“We have to keep going until the job is done,” he said.
Some skeptics accused the ECB of overreacting despite lagging behind major central banks.
“There is a significant risk that this decisive approach by the ECB will not only lead to lower growth and employment than today, but also below what is needed to control inflation,” wrote Erik F Nielsen, the group’s chief economic adviser. of UniCredit Bank.
“Growing concerns about their reputation could lead the ECB and possibly the Fed as well to overdo monetary tightening,” he added.
“It is still difficult for us 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.”