ECB raises rates by an unprecedented 75 basis points to fight inflation

FRANKFURT, Sept 8 (Reuters) – The European Central Bank raised key rates by a record 75 basis points on Thursday and announced further hikes, prioritizing the fight against inflation even as the bloc’s economy falters. points to a probable winter recession.

As inflation hits a half-century high and approaches double-digit territory, policymakers worry that rapid price growth will take hold, eroding the value of household savings and triggering a wage-price spiral.

Following its July rate hike, the ECB raised its deposit rate from zero to 0.75% and raised its main refinancing rate to 1.25%, their highest levels since 2011, with new measures scheduled for October and December.

“We have a longer way to go in the future,” ECB President Christine Lagarde told a press conference, adding that there was unanimous agreement among policymakers on the need an increase of 75 basis points to “preload” the movement towards rates compatible with bringing inflation to its medium-term objective of 2%.

Policymakers have oscillated for weeks between a 50 and 75 basis point increase, but another jump in headline and underlying inflation seems to have settled the debate, as the figures indicate that price growth is now creeping in in the wider economy, making it even more difficult to uproot.

Indeed, the ECB raised its inflation projections again, raising the 2023 outlook from 3.5% to 5.5% and placing the 2024 rate at 2.3%, above its 2% target.

Markets weren’t surprised, however, as investors had already priced the likelihood of a 75 basis point move at more than 80%, although economists polled by Reuters were more evenly split, showing only a slight majority expecting a bigger move.

With the ECB’s statement explicitly indicating that more rate hikes would be needed, markets continue to expect another 50 basis points at the October ECB meeting.

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

SERIOUS

At the start of the meeting, the Tories feared that anything other than an outsized gesture signaled that the ECB was not serious about its inflation-fighting mandate – officially its only objective.

This 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.

Half-hearted action also risked weakening the euro and further boosting inflation through more expensive energy imports.

The euro has languished around parity against the dollar for 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 raises prices for the consumer.

Policymakers have also argued for a frontloading of rate hikes, partly to send a strong signal of the central bank’s commitment to fighting inflation and partly to ensure that most hikes are made before the onset of a recession becomes evident.

With high energy prices undermining purchasing power, a slowdown is essentially inevitable. However, monetary policy is mostly powerless in the face of a supply shock-induced slowdown, which strengthens the case for hikes even if the economy suffers.

Some policymakers are now openly talking about a recession, and the new ECB projections also show significantly weaker growth in the years to come.

Still, a shallow recession could even help, some say, as the bloc’s labor market is increasingly tight and a slowdown could bring relief to businesses currently struggling to find workers.

The bank projects the eurozone economy to grow by 3.1% this year and 0.9% in 2023. While this year’s growth projection has been raised somewhat, it has been lowered sharply to 2023.

However, Lagarde said his so-called “downside” scenario – involving a complete shutdown of Russian gas supplies and policies including energy rationing – would plunge the euro zone into recession next year, with a contraction of 0.9% expected.

Editing by John Stonestreet, Tomasz Janowski and Hugh Lawson

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