HomeBusinessEuropean Central Bank implements record rate hike to combat energy price shocks

European Central Bank implements record rate hike to combat energy price shocks

The move brings the benchmark interest rate for the 19 countries that use the euro to 0.75%. It follows the central bank’s first hike since 2011, in July, when interest rates were raised to zero after years in negative territory. It expects to raise interest rates in the next “several meetings,” the ECB said in a statement.

“The Governing Council took today’s decision and expects to raise interest rates further as inflation remains much too high and is likely to remain above target for an extended period of time,” the ECB added.

Eurozone inflation reached 9.1% in August as a result of rising energy costs and rising food prices.

Europe has been trying to phase out Russia’s fossil fuel exports since the February invasion. Moscow has responded by cutting natural gas flow to Germany and other EU countries, sending prices skyrocketing and forcing governments to spend hundreds of billions on subsidizing corporate and household bills.

Decades of inflation are already taking its toll: recent surveys indicate that activity fell for the second consecutive month in August, with Europe’s largest economy, Germany, experiencing a particularly sharp decline. The region’s gross domestic product, the economy’s broadest measure, could contract in the third quarter. Economists warn that a European recession is on the way.

But the central bank is concerned that the energy price shock is already fueling expectations for higher inflation in the medium term. That could make the task of bringing interest rates back to the ECB’s 2% target rate significantly more difficult.

“Price pressures have continued to strengthen and broaden across the economy, and inflation could rise further in the near term,” the ECB said.

It now expects inflation to average 8.1% this year and 5.5% in 2023, a sharp increase from earlier forecasts. Economic growth, on the other hand, would come out weaker than expected: 3.1% this year and only 0.9% next year.

“However, there seems to be universal agreement that higher rates are needed to avoid embedding higher inflation.” [Russian] President Putin is already creating a lot of slack in the European economy,” said Kit Juckes, strategist at Societe Generale.

Speaking to reporters, ECB President Christine Lagarde acknowledged that in a “downward scenario,” including a complete suspension of Russian gas to Europe and widespread energy rationing, Europe would slide into recession and the economy would shrink by 0.9% by 2023. .

“It still seems likely that once the ECB realizes how deep the recession we expect to unfold is, the ECB will postpone rate hikes sometime in early 2023,” said Holger Schmieding, chief economist at Berenberg.

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