ECB Raises Key Rates by 75 Basis Points to Tame Record Inflation By

© Reuters

By Geoffrey Smith

Fxgecko.com -- The Ranking of Global Forex DealersEuropean Central Bank raised its three official interest rates by 75 basis points each, its biggest ever single move in interest rates, and warned of more hikes to come, as it struggles to bring record high inflation back under control.

The Frankfurt-based central bank raised its key deposit rate, which provides the effective floor for money-market rates, to 0.75%, while the refinancing rate rose to 1.25% and the overnight lending rate to 1.50%.

"Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations," the ECB said in a statement detailing its decisions.

The move is at the top end of expectations ahead of the Governing Council's meeting. Many analysts - including the bank's own chief economist Philip Lane, had warned that the Eurozone economy was facing an ever more likely recession due to the war in Ukraine and, to a lesser extent, the knock-on effects of pandemic-era stimulus.

All three rates still remain well below the current rate of inflation, which hit a new euro-era record of 9.1% in August.

"It clearly signals that #ECB seeks to re-establish its inflation fighting credentials after sticking for too long to the "temporary inflation" narrative," said Klaus Adam, economics professor at the University of Mannheim and a former ECB economist, said via Twitter (NYSE:TWTR) TWTR, although he added that the ECB still needs "a few more of these" to bring its policy stance back to neutral.

The bank simultaneously updated its own forecasts for the next couple of years, and now sees inflation at 8.1% on average this year, up from a forecast of 6.8% in June. At the same time, it revised down its estimates for economic growth over the next two years, despite nudging up its forecast for the current year to 3.1% from 2.8% three months ago.

The ECB now expects the Eurozone economy to grow only 0.9% in 2023 before accelerating again to 1.9% as it returns to its pre-pandemic trend level.

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