Inflation woes push Europe’s central bank to 1st interest rate hike in 11 years
Global News
The European Central Bank hiked interest rates by half a percentage point, 25 basis points more than expected, as it signals inflation needs to be stifled.
The European Central Bank raised interest rates by more than expected on Thursday, confirming that concerns about runaway inflation now trump growth considerations, even as the euro zone economy reels from the impact of Russia’s war in Ukraine.
The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the euro zone central bank’s first rate hike for 11 years.
Ending an eight-year experiment with negative interest rates, the ECB also increased its main refinancing rate to 0.50 per cent and promised further rate hikes possibly as soon as its next meeting on Sept. 8.
“Further normalization of interest rates will be appropriate,” the ECB said. “The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions,” the ECB said in a statement.
The ECB had for weeks guided markets to expect a 25 basis point increase but sources close to the discussion said 50 basis points was put in play shortly before the meeting as indicators pointed to a further deterioration of the inflation outlook.
With inflation already approaching double-digit territory, it is now at risk of getting entrenched above the ECB’s two per cent target and any gas shortage over the coming winter is likely to push prices even higher, perpetuating rapid price growth.
Economists polled by Reuters had predicted a 25 basis point increase but most said the bank should actually hike by 50 basis points, lifting its record-low minus 0.5 per cent deposit rate to zero.
The euro, which fell to a two-decade low against the dollar earlier this month, firmed around a half a percent on the ECB’s decision.
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