The European Central Bank increased interest rates at the fastest rate in the history of the euro currency in an effort to rein in out-of-control inflation. This move highlighted the bank’s resolve to keep prices under control despite the possibility of a recession.
At a meeting on Thursday in Frankfurt, the 25-member governing council increased its interest rate benchmarks by three-quarters of a percentage point, matching its record hike from last month and joining the U.S. To combat rising consumer costs, the Federal Reserve is raising rates quickly in a series of steps.
ECB President Christine Lagarde said the risk is growing that the 19-country eurozone may enter a recession. However, she asserts that “inflation remains far too high” and will remain high for a considerable amount of time, therefore the bank expects to keep raising rates.
“We’re not done yet,” she said to reporters despite bank predictions that the economy will decline the rest of this year and the start of the next, adding that “there is still more territory to cover.”
“In the present state of uncertainty, with the likelihood of recession looming much more on the horizon … everyone has to do their job,” Lagarde said. “Our job is price stability. This is our primary mandate, and we are riveted to that.”
The cost of credit for households and businesses is being driven up by central banks around the world. Their objective is to stop the escalating inflation caused by rising energy prices linked to the Russia-Ukraine conflict, post-pandemic supply constraints, and a resurging demand for goods and services following the relaxation of Covid-19 limitations. For the third time in a row, the Fed increased interest rates last month by three-quarters of a percent.
For central banks, quarter-point rises have typically been the norm. But that was before the eurozone’s inflation rate rocketed to 9.9 percent as a result of higher natural gas and energy costs brought on by Russia’s reduction of gas supplies during the Ukraine War.
“A long-lasting war in Ukraine remains a significant risk,” Lagarde said. “Confidence could deteriorate further and supply-side constraints could worsen again. Energy and food costs could also remain persistently higher than expected. A weakening world economy could be an additional drag on growth in the euro area.”
Since inflation reduces consumer purchasing power, many economists predict that the 19 nations that use the euro will experience a recession at the end of this year and the start of the following year. The American economy expanded in the third quarter of 2022 after contracting in the first half of the year, despite inflation in the U.S. being close to 40-year highs of 8.2 percent, driven in part by higher pandemic support spending than in Europe.
In just three months, the ECB has increased rates by a whole two percentage points, a distance that took 18 months to travel during its most recent lengthy hiking phase in 2005–2007 and 17 months in 1999–2000. The standard for quick bank loans is currently 2 percent, which was last reached in March 2009. Analysts predict that the next meeting in December may see a lesser rate increase.
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