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The ECB’s Governing Council decided to increase the deposit facility rate to 0.75 percent from zero the main refinancing rate to 1.25 percent and the marginal lending facility to 1.50 percent effective September 14 according to the bank’s monetary policy statement. This frontloads the shift away from highly accommodative policy toward levels that support a timely return of inflation to the 2 percent medium-term target the ECB said. The adjustment marks the largest single move since the euro’s launch and follows a first hike of 50 basis points in July after more than a decade of unchanged or negative rates.
According to the ECB statement inflation reached 9.1 percent in August based on Eurostat’s flash estimate with energy prices surging 38.3 percent and remaining the main contributor. Soaring energy and food costs together with demand pressures from economic reopening and ongoing supply bottlenecks have broadened price increases across the economy the central bank assessment found. Inflation may climb further in the near term while the updated staff projections now see it averaging 8.1 percent for 2022 well above earlier forecasts.
The ECB noted that economic growth has slowed markedly after a first-half rebound with output expected to stagnate in late 2022 and the first quarter of 2023. Very high energy prices are eroding household purchasing power and although supply bottlenecks are easing they continue to weigh on activity the bank’s evaluation stated. Policymakers nevertheless expect to raise interest rates further over the next several meetings because inflation is likely to remain above target for an extended period.
ECB President Christine Lagarde said in the press conference that followed the decision that the 75-basis-point increase was taken unanimously and that the bank is heading toward neutral rates with some frontloading. “We took today’s decision and expect to raise interest rates further because inflation remains far too high and is likely to stay above our target for an extended period” Lagarde stated. She added that monetary policy cannot directly resolve energy prices but must prevent second-round effects and persistent shifts in inflation expectations.
Goldman Sachs Research projected that without intervention the typical EU family could face energy bills of 500 euros per month by early 2023 up 200 percent from 2021 levels as Russian gas flows have been curtailed. The reduction in supplies has sent wholesale gas prices to record levels exacerbating the inflationary shock across the 19-country euro area according to multiple economic analyses. The ECB has called for structural policies to raise growth potential and strengthen resilience while keeping its future rate path data-dependent and meeting-by-meeting.
The rate decision brings borrowing costs to their highest levels since 2011 and aligns the ECB more closely with aggressive tightening cycles pursued by the US Federal Reserve and other central banks Reuters reported. Market analysts cited in the coverage described the move as a response to upside surprises in recent inflation data and a more persistent outlook for price pressures linked to deglobalisation climate risks and energy challenges. Eurostat figures confirm that nine euro area countries recorded double-digit inflation rates in August with Estonia exceeding 25 percent.
