The European Central Bank raised interest rates by 75 basis points to tackle record inflation, despite concerns that the eurozone is heading into recession due to soaring energy prices.
The move, in line with the ECB’s previous biggest increase in borrowing costs, raised the bank’s benchmark deposit rate from zero to 0.75% – highest level since 2011.
The euro moved between gains and small losses against the dollar in the minutes following the ECB rate hike announcement, fluctuating close to the same level as the greenback. Europe’s regional Stoxx 600 share index was unchanged.
This is the ECB’s second consecutive increase in borrowing costs, the first time in more than a decade it raised interest rates in July.
The increase comes despite concerns that the currency area will slide into recession in the coming months as energy prices soar – largely as a result of Russia cutting off vital supplies of its gas. Europe – affects businesses and households in the region.
However, eurozone inflation hit a new high of 9.1% in the year to August, well above the ECB’s 2% target, while unemployment fell to a record low of 6. 6% in July. The euro also fell to a 20-year low against the dollar, boosting import prices, while growth unexpectedly rose 0.8 percent in the second quarter.
Such development strengthen the case for the ECB to take more aggressive action to contain inflation, even if it causes job losses and growth. The last time the ECB raised interest rates by 0.75 percentage points was a 3-week technical correction to smooth out the euro’s launch in January 1999.
The ECB said its main refinancing rate on bank liquidity will increase from 0.5% to 1.25%. The marginal lending rate on overnight loans to banks will increase from 0.75% to 1.5%.
In the government bond market, yields on two-year German bonds – which are sensitive to changes in interest rate expectations – added 0.06 percentage points to 1.15% as debt instrument prices fell. down lower. The 10-year Bund yield, considered a proxy for borrowing costs across the eurozone, rose 0.02 percentage points to 1.59%.
Italy’s equivalent output was generally stable at 3.87%.