The ECB raises interest rates by an unprecedented 75 bps to fight inflation

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  • Raises the deposit rate to 0.75% from zero
  • Eurozone inflation uncomfortably high and rising
  • New ECB forecasts show higher inflation, lower growth
  • Several interest rate hikes flagged
  • Lagarde speaks at 1245 GMT

FRANKFURT, Sept 8 (Reuters) – The European Central Bank raised its key interest rates by an unprecedented 75 basis points on Thursday and signaled further increases, prioritizing the fight against inflation even as the bloc’s economy heads into a likely winter recession.

With inflation at a half-century high and approaching double-digit territory, policymakers worry that rapid price increases could take hold, erode the value of household savings and set off a wage-price spiral.

Following the July rate hike, the ECB raised the deposit rate to 0.75% from zero and lifted the main refinancing rate to 1.25%, the highest level since 2011, with further moves expected in October and December.

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“We have more travel to cover going forward,” ECB President Christine Lagarde told a news conference, adding that there had been unanimous agreement among policymakers on the need for a 75 basis point hike to “frontload” developments against interest rates that are in compliance with bringing inflation to the 2% intermediate target.

Reuters graphics

Policymakers had for weeks oscillated between a 50 and 75 basis point increase, but a fresh jump in both headline and core inflation appears to have settled the debate, as figures indicate that inflation is now seeping into the wider economy, making even harder to root out.

Indeed, the ECB raised its inflation forecasts once again, lifting its outlook for 2023 to 5.5% from 3.5% and setting the 2024 rate at 2.3%, above its 2% target.

Markets were little surprised, however, as investors had already priced in a more than 80% probability of a 75 basis point move, although economists polled by Reuters were more evenly split, showing only a small majority expected the bigger move.

With the statement from the ECB explicitly stating that more rate hikes will be necessary, markets continue to expect another 50 basis points at the ECB’s October meeting.

Asked about the future direction and pace of interest rate changes, Lagarde said: “We didn’t say ‘increase at 75’ as if 75 is the norm – it’s not.”


Going into the meeting, conservatives feared that anything short of an outsized move would signal that the ECB was not serious about its inflation-fighting mandate – officially its only goal.

That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB and raise questions about the bank’s inflation targeting framework.

Reduced actions also risked weakening the euro and increasing inflation further through more expensive energy imports.

The euro has weakened around parity against the dollar for several weeks, not far from a two-decade low hit earlier this month.

This means more expensive exports of everything from oil to cars, which then increases prices for consumers.

Reuters graphics

Politicians have also argued for pre-loading interest rate increases, partly to send a strong signal about the central bank’s inflation-fighting commitment, and partly to get most of the increases implemented before the beginning of a recession becomes apparent.

With high energy prices reducing purchasing power, a downturn is essentially inevitable. However, monetary policy is mostly powerless against a supply shock-driven downturn, which strengthens the case for increases even if the economy suffers.

Some politicians are now openly talking about a recession, and the ECB’s new projections also show sharply lower growth in the coming years.

Still, a shallow recession could even be helpful, some argued, as the bloc’s labor market is increasingly tight and a slowdown could provide relief to businesses now struggling to find workers.

The bank sees the eurozone economy growing by 3.1% this year and 0.9% in 2023. While this year’s growth forecast was lifted slightly, it was reduced sharply for 2023.

However, Lagarde said its so-called “downside” scenario – which involves a total shutdown of Russian gas supplies and policies including energy rationing – would plunge the eurozone into recession next year, with a 0.9% contraction expected.

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Editing by John Stonestreet, Tomasz Janowski and Hugh Lawson

Our standards: Thomson Reuters Trust Principles.

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