FRANKFURT, Germany (AP) — The European Central Bank has launched another outsized interest rate hike aimed at stifling runaway inflation, raising rates at the fastest pace in euro history and underscoring the resolve of the bank to control prices despite the threat of recession.
The 25-member Governing Council raised its benchmark interest rates by three-quarters of a percentage point at a meeting in Frankfurt on Thursday, matching its record increase from last month and joining the US Federal Reserve in carrying out a series of rapid increases to cope with soaring consumption rates. prices.
ECB President Christine Lagarde acknowledged the growing risk that the 19-nation eurozone could plunge into recession, but said “inflation remains far too high” and will remain high for an extended period, so that the bank expects to continue to increase.
“We’re not done yet. There is more ground to cover,” she told reporters, despite banks’ expectations that the economy would weaken the rest of this year and early next.
“In the current state of uncertainty, with the likelihood of a recession looming much higher on the horizon…everyone has to do their job,” Lagarde said. “Our job is price stability. That’s our core mandate, and we’re riveted for that.”
Central banks around the world are rapidly raising interest rates that drive the cost of credit for businesses and consumers. Their aim is to halt runaway inflation fueled by high energy prices linked to Russia’s war in Ukraine, post-pandemic supply bottlenecks and reviving demand for goods and services. services after the easing of restrictions related to COVID-19. The Fed raised rates by three-quarters of a point for the third straight time last month.
Quarter-point increases have generally been the norm for central banks. But that was before inflation hit 9.9% in the eurozone, fueled by rising natural gas and electricity prices after Russia cut gas supplies during the war in Ukraine.
“A protracted war in Ukraine remains a significant risk,” Lagarde said. slow down growth in the euro area.
Inflation robs consumers of their purchasing power, leading many economists to forecast a recession for the end of this year and the beginning of next year in the 19 countries that use the euro as their currency. While inflation in the United States is near its highest level in 40 years at 8.2%, fueled in part by larger pandemic support spending than in Europe, the American economy has grown in third quarter after declining in the first half of 2022.
The ECB has now hiked rates by 2 percentage points in just three months, a distance it took 18 months to cover in its last extended hike in 2005-2007 and 17 months in 1999-2000. The benchmark for short-term lending to banks now stands at 2%, a level last seen in March 2009.
The next meeting in December could see a lower rate hike, analysts said.
“We expect the pace of the upside to slow as the window of opportunity to raise interest rates narrows with a eurozone recession looming,” said Nicolas Sopel, macroeconomic strategist. senior at Quintet Private Bank.
Higher rates can control inflation by making it more expensive to borrow, spend and invest, which reduces demand for goods. But the effort to raise rates has also raised concerns about their impact on economic growth and on equity and bond markets.
To mop up economic stimulus efforts that have overshot now that rates are rising, Lagarde encouraged banks to repay cheap long-term loans they received from the ECB to help them keep lending to businesses. The central bank raised interest rates on loans and said it would let banks voluntarily repay the money.
Another potentially fraught issue with reducing stimulus without triggering turbulence in jittery markets is what to do with the bank’s 4.9 trillion euro ($4.9 trillion) bond pile bought as part of previous efforts to reduce borrowing costs in the market. That won’t be clarified until the December meeting, Lagarde said.
For now, the bank is maintaining the size of its holdings by using money from maturing bonds to buy new ones. Since the ECB is such a large holder of bonds, shrinking the bond stack could disrupt bond markets and make government borrowing costs higher.
The risks of bond market turmoil were illustrated last month when then UK Prime Minister Liz Truss announced tax cuts and spending increases that raised questions about state finances , triggering a sudden sale of UK government bonds and forcing her to resign after 45 days in office.
Bond market turmoil also threatened to shatter the eurozone during its 2010-2015 debt crisis. Now, borrowing costs for indebted eurozone governments like Italy have risen along with ECB interest rates.
The euro flirted below parity with the dollar after the ECB’s decision and remains close to its lowest levels for 20 years. A weaker euro worsens inflation by increasing the price of imported goods.
Reasons for the lower exchange rate include higher US interest rates that are drawing money into dollar-denominated investments and, more broadly, the dim outlook for the European economy.
David Mcugh, The Associated Press
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