The European Central Bank has announced a record rise in eurozone interest rates to combat inflation.
Prices in the EU are rising at the fastest rate in a half-century as energy costs skyrocket.
The European Central Bank raised all of its key interest rates by three-quarters of a percentage point and warned that it would likely raise rates again later this year.
In July, the bank raised interest rates for the first time in more than 11 years.
“Price pressures have continued to strengthen and spread across the economy,” the ECB stated following its most recent decision.
The ECB increased its key deposit rate, which is the interest rate it pays on deposits, to 0.75% from zero and increased its main refinancing rate, which is the interest rate banks must pay when borrowing money from the ECB, to 1.25% from 0.5%.
Central banks raise interest rates to increase the cost of borrowing, which should encourage people to borrow less and save more. In theory, this helps to limit price increases.
Higher energy prices are driving inflation around the world. Prices rose faster as economies recovered from the effects of the coronavirus pandemic, but they rose even faster as a result of Russia’s war in Ukraine.
Christine Lagarde, president of the European Central Bank, stated that the central bank could not control high energy prices.
“I can’t lower the price of energy,” she explained. “I cannot persuade the world’s major players to lower gas prices. I am unable to reform the electricity market. And I am pleased to see that the European Commission is considering steps in this direction because monetary policy will not reduce energy prices.”
She went on to say that if gas prices continue to “skyrocket,” it will be “recessionary.”
Suppose Russia cuts off all gas supplies to the EU. In that case, the ECB envisions gas rationing across the entire eurozone and a recession in 2023 if alternative gas supplies from Asia, Norway, and the US cannot be secured. Ms. Lagarde stated.
With the ECB’s statement explicitly stating that more rate hikes are required, markets are still expecting another half-point increase at the bank’s October meeting.
According to Eurostat, eurozone inflation will be 9.1% in August, up from 8.9% in July.
According to Janet Mui, head of market analysis at wealth manager Brewin Dolphin, the ECB is “playing catch up” with the US Federal Reserve and the Bank of England.
The European Central Bank (ECB) forecasts eurozone inflation of 8.1% this year, 5.5% in 2023, and 2.3% in 2024, but “these are subject to a high degree of uncertainty given the volatility in gas prices.”
Some economists predict a eurozone downturn as high energy prices sap purchasing power.
Some policymakers have mentioned a recession, and the European Central Bank’s new projections show sharply lower growth in the coming years.
“After a rebound in the first half of 2022, recent data point to a significant slowdown in eurozone economic growth,” the ECB said.