European Central Bank’s biggest rate hike ever

FRANKFURT, Germany – The European Central Bank delivered its biggest-ever rate hike on Thursday, after the US Federal Reserve and other central banks in a rapid rate hike across the country. demand to eliminate record inflation is squeezing consumers and pushing Europe into recession.

The bank’s 25-member board of directors raised its key benchmarks by an unprecedented three-quarters of a percentage point across the 19 countries that use the euro. The ECB usually changes interest rates by a quarter point and has never raised its key bank lending rate by three quarters of a point since the introduction of the euro in 1999.

The bank said it expects more price hikes to come as “inflation is likely to pick up further in the near term” and noted that the economy is expected to “stagnate later this year”. The move follows a half-point rally at the ECB’s last meeting in July, the first increase in 11 years.

The increase in jumbo is aimed at raising borrowing costs for consumers, governments and businesses, which in theory slows spending and investment and cools rising consumer prices by reducing demand. goods.

Analysts say it is also aimed at bolstering the bank’s credibility after they downplayed the duration and severity of this inflationary flare. After hitting a record 9.1% in August, inflation could rise to double digits in the coming months, economists said.

The war in Ukraine has fueled inflation in Europe, with Russia sharply reducing supplies of cheap natural gas used to heat homes, generate electricity and run factories. That has caused gasoline prices to increase 10 times or more.

European officials have criticized the cuts as blackmail intended to pressure and divide the European Union over its support for Ukraine. Russia has blamed technical problems and threatened to completely cut off energy supplies this week if Western institutes plan to cap Moscow’s oil and natural gas prices.

Some economists say a rate hike by the ECB could exacerbate the European recession predicted later this year and early 2023, caused by higher inflation making everything from groceries to utility bills become more expensive.

Energy prices are out of the ECB’s control, but the bank has reasoned that a rate hike would prevent higher prices from being included in expectations for the current wage and price agreements and decisive action will prevent demand from rising further if inflation takes hold.

“The European Central Bank” wants to fight inflation – and wants to be seen as anti-inflation,” said Holger Schmieding, chief economist at Berenberg bank.

While energy prices and government support programs to insulate consumers from some pain will “have a much larger impact on inflation and the depth of the recession than monetary policy.” ,” he said.

Carsten Brzeski, chief eurozone economist at bank ING, also said the upcoming recession “will be driven by energy prices, not interest rates.”

A higher rate can help fight inflation by increasing the exchange rate of the euro against the dollar and other currencies. That’s because the euro’s recent slide below $1 – driven by rising energy costs and a softening economic outlook – makes imported goods, including energy, more expensive.

The ECB has lagged behind other global central banks in raising interest rates. Central banks around the world have scrambled after inflation caused by Russia’s war in Ukraine and the lingering effects of the COVID-19 pandemic, which has sent energy prices soaring and limited supplies parts and raw materials.

The sudden interest rate hike comes after years of low borrowing costs and inflation driven by broad trends such as globalization, aging populations and digitalisation.

The ECB benchmark is currently 1.25% for lending to banks. The Fed’s main benchmark is 2.25% to 2.5% after several major rate hikes, including 2/3 points. The Bank of England’s main benchmark is 1.75%, and the Bank of Canada on Wednesday rose three-quarters of a point to 3.25%.

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