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ECB Raises Key Rates by 75 Basis Points to Tame Record Inflation By

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By Geoffrey Smith — The European Central Bank raised its three official interest rates by 75 basis points each, the largest interest rate move ever, and warned of more hikes as it struggles to bring record high inflation back under control.

The Frankfurt-based central bank raised its main deposit rate, which is the effective floor for money market rates, to 0.75%, while interest rates rose to 1.25% and overnight money rates to 1.50%.

“Based on its current assessment, the Governing Council expects to raise interest rates further in the coming several meetings to dampen demand and guard against the risk of a continued upward shift in inflation expectations,” the ECB said in a statement. detailing its decisions. “Price pressures have continued to strengthen and broaden across the economy and inflation could rise further in the near term.”

The move is at the higher end of expectations ahead of the Board of Directors meeting. Many analysts, including the bank’s own chief economist Philip Lane, had warned that the eurozone economy was facing an increasingly likely recession due to the war in Ukraine and, to a lesser extent, the knock-on effects of the stimulus measures. from the pandemic era.

All three interest rates are still well below , which reached a new euro-era record of 9.1% in August.

In her regular press conference after the meeting, President Christine Lagarde stressed that 75 basis point increments are “not the norm.”

The euro, which had remained largely unchanged before those comments, fell by about half a cent in the aftermath. Eurozone government bond yields, which often provide a better indication of how the ECB’s actions are being received, rose as markets revised their medium-term forecasts. However, the benchmark’s 10-year yields rose broadly in parallel, avoiding the kind of spread widening that signals heightened stress in euro-zone financial markets.

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“It clearly indicates that #ECB wants to restore its anti-inflation credentials after holding on to the narrative of ‘temporary inflation’ for too long,” Klaus Adam, an economics professor at the University of Mannheim and former ECB economist, said via Twitter. although he added that the ECB needs “a few more of these” to return its policy stance to neutrality.

Lagarde acknowledged that the bank’s rates are still at levels that stimulate the economy, but she declined to say where she thought the “neutral” rate could be, or where she expects the bank to stop walking.

At the same time, the bank updated its own forecasts for the coming years and now sees an average inflation rate of 8.1% this year, compared to a forecast of 6.8% in June. At the same time, it has revised down its economic growth estimates for the next two years, despite revising its current-year forecast upwards from 2.8% three months ago to 3.1%.

The ECB now expects the eurozone economy to grow just 0.9% in 2023, before accelerating again to 1.9% as it returns to pre-pandemic trend levels. Despite this, Lagarde said the bank does not expect a recession, just that the economy will stagnate over the next six months.

Apart from that, the bank also put an end to a hangover from the period of negative interest rates. It said it will return to paying a uniform rate to banks for their reserves, which are largely parked in the deposit facility. Previously, part of this could have been compensated at a higher level, reducing the penalty effect for holding excess liquidity.

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