The European Central Bank has raised the cost of borrowing to tackle inflation which soared last month in the eurozone to 9.9%.
In line with financial market expectations, the 25-member ECB Governing Council raised the deposit rate by three-quarters of a point to 1.5% – the fastest rise in eurozone history .
Pledging to bring inflation down to 2%, ECB President Christine Lagarde said she was nonetheless concerned about a looming recession in the 19-member currency bloc, sending a strong signal that future price hikes rates would be moderate.
Investors have bet the deposit rate, which governs the borrowing costs passed on by commercial banks, is set to peak at 3% next year as the German, Italian, French and Spanish economies contract.
Asked about political leaders’ concerns that soaring interest rates would impact growth, Lagarde said she was aware of the potential damage of a recession to poorer households and was also concerned. the effect of inflation on those most vulnerable to high prices.
Lagarde said inflation remained far too high and would stay high for an extended period, so further rate hikes from the ECB should be expected. “We’re not done yet. There is more ground to cover,” she said.
Carsten Brzeski, global head of macroeconomics at Dutch banking group ING, said the U-turn in policy-making at the central bank represented a “paradigm shift” from last year, when Lagarde had firmly defended a looser monetary policy.
“In just over three months, the ECB has raised interest rates by a total of 2 percentage points,” he said. “It’s the sharpest, most aggressive touring bike ever.”
Lagarde said the ECB had suspended plans to start selling some of the €5bn (£4.3bn) of government bonds it held as part of its easing program quantitative, many of which were issued by the weaker eurozone countries. Maturing bonds would continue to be bought by the ECB, she said.
Italy’s new prime minister, Giorgia Meloni, said this week that interest rate hikes were hurting households and businesses and were “considered by many a reckless choice”.
His remarks followed those of French President Emmanuel Macron, who complained about the “shattering demand” from central banks to fight inflation, which is only 5.6% in France.
ECB critics questioned why the central bank was raising rates during a long and damaging war in Ukraine and when the economic outlook was already showing gross domestic product growth turning negative.
Other central banks have been asked the same question, including the Bank of England, which is expected to push its key rate to 5% in 2023.
The US Federal Reserve raised rates by three-quarters of a point for the third straight time last month to a range of 3% to 3.25%. He should raise them again at his next committee meeting in a fortnight.
Inflation in the United States is near its highest level in 40 years at 8.2%, fueled in part by stronger growth and greater pandemic support spending than in Europe.
The ECB expects eurozone inflation to fall to 2.3% by the end of 2024.