European Central Bank makes biggest ever interest rate hike

FRANKFURT, Germany (AP) — The European Central Bank made its largest interest rate hike on Thursday, following the US Federal Reserve and other central banks in a global rush of rapid rate hikes designed to stifle inflation that is squeezing consumers and push Europe into recession.

The bank’s board of governors raised its main benchmarks by an unprecedented three-quarters of a percentage point for the 19 countries that use the euro. The ECB typically changes rates by a quarter of a point and has not raised its key rate by three-quarters of a point since the launch of the euro in 1999.

Bank President Christine Lagarde said the ECB would keep the rate hike “over the next few meetings” because “inflation remains far too high and is likely to remain above our target for an extended period.”

Lagarde stopped before predict a recessionalthough many economists predict one at the end of the year and the beginning of 2023 in the form of high energy and Food prices undermine people’s purchasing power. The bank’s assumption is that economic output would not fall outright but would “stall” later this year and early next year, she said.

The bank’s massive increase aims to increase the cost of borrowing for consumers, governments and businesses, which in theory slows spending and investment and dampens the spike in consumer prices by reducing demand Goods.

Analysts say it is also aimed at bolstering the bank’s credibility after it underestimated the duration and severity of this inflation spike. After reaching a record 9.1% in Augustinflation could reach double digits in the coming months, economists say.

The war in ukraine fueled inflation in Europe, with Russia sharply cutting supplies of cheap natural gas used to heat homes, generate electricity and run factories. This has driven gasoline prices up 10 times or more.

European officials denounce budget cuts as blackmail aimed at pressuring and dividing the European Union over its support for Ukraine. Russia blamed technical problems and threatened this week to completely cut off the energy supply if the West institutes planned price caps on Moscow’s natural gas and oil.

The ECB has lagged other central banks in raising rates. Central banks around the world have collapsed after being caught off guard by war-fueled inflation in Ukraine and the lingering effects of the COVID-19 pandemic, which have pushed up energy prices and restricts the supply of parts and raw materials.

The sudden interest rate hike follows years in which borrowing costs and inflation have remained low due to general trends such as globalization, aging populations and digitalisation.

Lagarde dismissed the comparisons, saying “we’re not trying to emulate any other central bank” and pointing out that the ECB began tightening monetary policy in December, when it decided to phase out its pandemic stimulus with bond purchases.

Some economists argue that the ECB’s interest rate hikes, including a up half a point at its last meeting in Julycould worsen a European recession forecast for the end of this year and the beginning of 2023, caused by higher inflation which has caused everything from groceries to higher utility bills.

Lagarde said a 2022-23 recession would only occur in a “really grim” worst-case scenario where all Russian natural gas is cut off, alternative supplies are unavailable and governments have to resort to rationing fuel. energy.

She commended the efforts made by the EU Executive Commission to contain energy pricessuch as through electricity market regulation, and noted that while the rate hikes send “a strong signal” of the bank’s commitment to fighting inflation, “I cannot reduce the energy prices.

But the bank said the rate hikes will prevent higher prices from being priced into expectations for wage and price deals and that decisive action now will prevent the need for even bigger hikes if inflation takes root.

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

However, energy prices and government support programs to shield consumers from some of the pain “will have a much bigger impact on inflation and the depth of the impending recession than monetary policy,” he said. he declared.

Rate hikes often support a currency’s exchange rate, but the euro has been under pressure due to broader fears about recession and economic growth. He has recently fell below $1, the lowest level in 20 years. The euro slid about half a cent after the ECB’s decision, to around 99.5 US cents.

The ECB benchmark is now 1.25% for lending to banks. The Fed’s main benchmark is 2.25% to 2.5% after several large rate hikes, including two by three-quarter points. The Bank of England’s key benchmark is 1.75%, and the Bank of Canada raised rates on Wednesday by three-quarters of a point to 3.25%.

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