European Central Bank raises rates by 75 basis points

The ECB announced a second consecutive increase in interest rates to combat galloping inflation.

Daniel Roland | AFP | Getty Images

The European Central Bank on Thursday announced a 75 basis point hike in interest rates, taking its benchmark deposit rate to 0.75%.

“This major step precipitates the transition from the current very accommodative level of policy rates to levels that will ensure the rapid return of inflation to the ECB’s medium-term target of 2%,” he said in a statement. communicated.

He added that he “expects to raise interest rates further as inflation remains far too high and is expected to remain above target for an extended period.”

It revised its inflation expectations upwards, forecasting an average of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

Markets had largely priced in a 75 basis point rise, with the euro holding steady against the pound and rising slightly against the dollar at 1.0005. Monday, the euro fell below 99 cents for the first time in 20 years.

The ECB’s decision follows a drop from -0.5% to zero at its July meeting. The central bank, which sets monetary policy for the 19 euro-along with nations, had kept rates in negative territory since 2014 in a bid to boost spending and tackle low inflation.

The central bank now faces an entirely different problem, with consumer prices in the eurozone up 9.1% in Augustsetting a ninth consecutive record.

Inflation is being boosted by soaring energy prices, which have skyrockets since Russia’s invasion of Ukraine in February. Price increases are also observed in areas such as food, clothing, cars, household appliances and services. Factors including persistent supply chain issues and the impact of recent heat waves helped push up prices.

Gross domestic product in the euro area increased by 0.8% in the second quarterhowever, many analysts say a eurozone recession is all but inevitable in the coming months as consumer purchasing power is reduced and businesses struggle to pass on rising input costs.

Like in the United Statesrecession warnings come despite an extremely tight labor market, with unemployment across the bloc at record lows record 6.6%.

Downside recession risk

At the press conference that followed, ECB President Christine Lagarde said that the central bank’s Governing Council had unanimously decided to raise its three key rates.

Lagarde said the bank remained dependent on meeting-by-meeting data and had assessed inflation figures and growth projections since its last meeting in July.

“While we conclude that energy is the main source of inflation, along with the rise in food, we also have inflation spreading to a range of products and services where demand plays a role,” he said. she declared.

“Thus, in the face of extremely high inflation, of such magnitude and persistence in sectors of this nature, determined measures had to be taken.”

Against accusations that the European Central Bank is lagging behind other major central banks on rate hikes, Lagarde said she began normalizing monetary policy from December when she ended her asset purchase program.

Asked by CNBC’s Annette Weisbach whether a recession was in the ECB’s forecast, Lagarde said the bloc’s baseline outlook was 3.1% GDP growth for 2022, 0.9% for 2023 and 1 .9% for 2024, avoiding a recession.

But his negative scenario, taking into account risks such as a complete shutdown of Russian energy supplies to the rest of Europe and rationing, predicted growth of 2.9% in 2022, a contraction of 0.9% in 2023 and growth of 1.9% in 2023.

“The ECB and other central banks have been torn between the need to crush inflation and their realization that recession risks continue to rise,” said Willem Sels, global chief investment officer at HSBC.

“Gas prices have risen sharply, and we know that the ECB is concerned that rising inflation will lead to higher wage demands, which could make inflationary pressures more tenacious. Monetary policy is acting with a lag, and ECB governors may have deemed it best to anticipation rate hikes and complete the hike by the end of the year,” he added in a note.

Sels said bond and equity markets reacted with “some concern.”

“Rate hikes will further increase borrowing costs for peripheral countries and tighten financial conditions, which could deepen the recession,” he added.
The pan-European Stoxx Europe 600 index was down 0.42% after the announcement, after a morning in the green

Any benefit to the euro would not be sustainable given the expected rate hikes by the Federal Reserve and the Bank of England, the rising cost of debt, a potential recession, the upcoming Italian elections and geopolitical risk, added Sels.

The pan-European Stoxx Europe 600 was down 0.42% after the announcement, after a morning in the green.

Thursday’s rate hike keeps the ECB below its “neutral” rate of between 1% and 2%.

Konstantin Veit, portfolio manager of the investment company Pimco, told CNBC‘s “Squawk Box Europe” on Thursday that it was now “uncontroversial” within the Frankfurt-based institution to break into that range before the end of the year.

The “most interesting” question now, he said, was what his “terminal rate” – the highest point – will be during this hiking cycle.

Markets will now look for clues as to whether it will cross above the neutral range into tightening territory.

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