The continual rising of goods and services in the eurozone reached a record high of 9.1% in August, spurring the European Central Bank to tear up its book of incremental increases.
To tackle continuous soaring prices of goods and services, the European Central Bank has announced an increase in the interest rates by 75 basis points, a move that took its benchmark deposit rate to 0.75%.
“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” said in a statement by the ECB.
The central bank furthered that it “expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.”
The rate announced on Thursday is the largest rate hike the eurozone will be witnessing since the inception of the current global inflation.
Also, the bank of England policymakers will meet in the next week which the recent ECB move is expected to pressure the bank of England to follow suit.
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Downside recession risk
The president of ECB Christine Lagarde said in a news conference that the decision to raise its three key interest rates was taken unanimously by the Governing council.
“While we conclude that energy is the major source of inflation, along with the increase in food, we also have inflation spreading across a range of products and services where demand plays a role,” she said.
“So in the face of inflation that is extremely high, that is of a magnitude and persistence across sectors of that nature, determined action had to be taken.”
When asked about the accusations that the ECB is lagging behind other major central banks in rate hikes, she responded that ECB had begun normalizing monetary policy from December when it ended its asset purchase program.
She was also questioned about recession in ECB’s forecast, Lagarde said the bloc’s baseline outlook was for 3.1% GDP growth for 2022, 0.9% for 2023 and 1.9% for 2024, avoiding a recession.
But its downside scenario, accounting for risks including a complete shut off of Russian energy supply to the rest of Europe and rationing, was for 2.9% growth in 2022, 0.9% contraction in 2023 and 1.9% growth in 2024.
“The ECB and other central banks have been torn between the need to crush inflation and their realisation that recession risks continue to increase,” said Willem Sels, global chief investment officer at HSBC.
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