ECB lifts rates by unprecedented 75 points

·2-min read

The European Central Bank has raised its key interest rates by an unprecedented 75 basis points and signalled further hikes, prioritising the fight against inflation even as the bloc's economy is heading for a likely winter recession.

With inflation at a half-century high and approaching double-digit territory, policymakers are worried that rapid price growth could become entrenched, eroding the value of household savings and setting off a wage-price spiral.

Following up on its July rate hike, the ECB raised its deposit rate to 0.75 per cent from zero and lifted its main refinancing rate to 1.25 per cent, their highest levels since 2011, with further moves anticipated in October and December.

"We have more journey to cover going forward," ECB President Christine Lagarde told a news conference, adding that there had been unanimous agreement among policymakers about the need for a 75-basis point hike to "frontload" the move towards rates consistent with bringing inflation to its 2 per cent mid-term target.

Policymakers had for weeks oscillated between a 50 and a 75 basis-point increase but another jump in both headline and underlying inflation appears to have settled the debate as figures indicate that price growth is now seeping into the broader economy, making it even harder to root out.

Indeed, the ECB raised its inflation projections once again, lifting the 2023 outlook to 5.5 per cent from 3.5 per cent and putting the 2024 rate at 2.3 per cent, above its 2 per cent target.

Markets were little surprised, however, as investors had already priced a more than 80 per cent likelihood of a 75 basis-point move even if economists polled by Reuters were more evenly split, showing only a slight majority expecting the larger move.

With the ECB statement explicitly saying more rate hikes would be needed, markets continue to expect another 50 basis points at the ECB's October meeting.

Asked about the future direction and pace of rate changes, Lagarde said: "We didn't say 'raise at 75' as if 75 is the norm - it is not."