Highlight
- Jumbo rise aims to raise the cost of borrowing for consumers, governments, businesses.
- After hitting a record 9.1% in August, inflation could hit double digits in the coming months.
- Economists say a hike in ECB interest rates could deepen the European recession, which could be predicted later this year.
The European Central Bank raised its biggest interest rate hike on Thursday, after the US Federal Reserve and other central banks said a global stampede of rapid rate hikes is meant to offset record inflation that is squeezing consumers and sending Europe into recession. Pushing towards. The bank’s 25-member governing council raised its key benchmark for the 19 countries that use the euro currency by three-quarters of a percentage point.
The ECB typically raises rates by a quarter-point and has never raised its key bank lending rate by three-quarters since the euro’s launch in 1999. The jumbo increase is aimed at raising the cost of borrowing for consumers, governments, and consumers. Business, which theoretically slows spending and investment and calms rising consumer prices by reducing demand for goods.
Analysts say it is also aimed at bolstering the bank’s credibility as it has been underestimating how long and how severe this outbreak of inflation will be. Economists say that after hitting a record 9.1% in August, inflation could rise in the double digits in the coming months. The war in Ukraine has fueled inflation in Europe, with Russia sharply reducing supplies of cheap natural gas used to heat homes, generate electricity and run factories. It has increased gas prices by 10 times or more.
European officials denounced the cuts, saying the blackmail was intended to pressure the EU on its support for Ukraine and divide it. Russia has blamed technical problems and this week threatened to completely shut down energy supplies if Western institutions scuttle Moscow’s plan for a price cap on natural gas and oil. Economists say the ECB’s interest rate hike could deepen a European recession projected for the end of this year and early 2023, due to high inflation that has made everything from groceries to utility bills more expensive .
Energy prices are beyond the control of the ECB, but the bank has argued that raising rates will prevent higher prices from denting expectations of wages and price deals, and that this decisive action may prevent the need for even bigger hikes. If inflation is included. Europe’s central bank “wants to fight inflation – and be seen as fighting inflation,” said Holger Schmeiding, chief economist at Berenberg Bank. Although energy prices and government aid programs to save consumers some of the pain “will have a much greater impact on inflation and the depth of the impending recession than monetary policy,” he said.
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