ECB raises interest rates to tackle soaring inflation

The European Central Bank imposed another large interest rate hike on Thursday in an attempt to slow soaring inflation across the eurozone.

The 25-member governing council raised its interest rate benchmarks by three-quarters of a percentage point at a meeting in Frankfurt.

That matched its record increase from last month, joining the US Federal Reserve in making a series of rapid hikes to tackle soaring consumer prices.

The ECB has now raised rates for the 19-country euro area by a full 2 percentage points in just three months — the fastest pace in the euro currency’s history.

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Inflation is almost 10 per cent, five times the ECB’s medium-term target.

Central banks around the world are rapidly raising interest rates, making borrowing more costly for businesses and consumers.

They aim to halt galloping inflation fuelled by high energy prices tied to Russia’s war in Ukraine, post-pandemic supply bottlenecks and reviving demand for goods and services after Covid-19 restrictions eased.

Quarter-point increases have usually been the norm for central banks.

But that was before inflation spiked to 9.9 per cent in the eurozone, due to higher prices for natural gas and electricity after Russia cut off most of its gas supplies.

Inflation in the US is near 40-year highs of 8.2 per cent, sparked in part by stronger growth and more pandemic support spending than in Europe.

Inflation robs consumers of purchasing power, leading many economists to pencil in a recession for the end of this year and the beginning of next in both the US and the 19 countries that use the euro as their currency.

Markets will be watching ECB president Christine Lagarde’s news conference for clues about how far the bank intends to go.

Analysts at UniCredit said Ms Lagarde was not likely to provide clues about the peak level of rates but “we suspect that she will drop hints pointing to an increasing likelihood that rates will have to be raised into restrictive territory, and a slower pace of hikes following today’s bold move".

At the last meeting in September, she indicated that three-quarters of a point was not the “norm” but added that decisions are being taking on a meeting-to-meeting basis.

Some analysts foresee a half-point increase at the last rate-setting meeting of the year in December and think the bank may pause after that.

The ECB foresees inflation falling to 2.3 per cent by the end of 2024.

Higher rates can control inflation by making it more expensive to borrow, spend and invest, lowering demand for goods.

But the concerted effort to raise rates has also raised concerns about their impact on growth and on markets for stocks and bonds. Years of low rates on conservative investments have pushed investors towards riskier holdings such as stocks, a process that is now going into reverse, while rising rates can lower the value of existing bond holdings.

The head of the International Monetary Fund, Kristalina Georgieva, has warned that tightening monetary policy “too much and too fast” raises the risk of prolonged recessions in many economies. The IMF forecasts that global economic growth will slow from 3.2 per cent this year to 2.7 per cent next year.

The ECB’s benchmark for short-term lending to banks now stands at 2 per cent, a level last seen in March 2009.

Updated: October 27, 2022, 1:28 PM