The European Central Bank raises interest rates by 75 basis points

On Thursday, the European Central Bank announced a 75 basis point rate hike, raising the deposit rate to 0.75%.

“This major step advances the transition from the prevailing ultra-facilitative level of policy rates to levels that will ensure a timely return of inflation to the ECB’s medium-term target of 2%,” it said in a statement.

She added that she “expects interest rates to rise further, because inflation is still very high and is likely to remain above target for a long time.”

It revised its inflation forecasts upward, forecasting an average of 8.1% in 2022, 5.5% in 2023, and 2.3% in 2024.

Markets largely priced 75 basis points higher, with the euro holding steady against the British pound and slightly up against the dollar to 1.0005. monday euro Dropped to less than 99 cents For the first time in 20 years.

The ECB’s move follows a From -0.5% to zero at its July meeting. The central bank, which sets monetary policy for 19 euroUsing states, it has kept interest rates in negative territory since 2014 in an effort to stimulate spending and combat low inflation.

The central bank now faces a very different problem, with consumer prices in the eurozone By 9.1% in Augustsetting the record for the ninth consecutive year.

Inflation is charged by runaway energy prices, which have rose Since the Russian invasion of Ukraine in February. A rise in prices was also observed in areas including food, clothing, cars, household appliances and services. Factors including Ongoing supply chain issues And the Side effects of recent heat waves It helped raise prices.

The ECB’s move indicates its willingness to sacrifice growth in order to combat these pressures.

GDP across the Eurozone by 0.8% in the second quarterHowever, many analysts say a recession in the eurozone is inevitable in the coming months as consumers’ purchasing power shrinks and companies struggle to pass on higher input costs.

As in the United StatesRecession warnings come despite a very tight labor market, with unemployment across the block in record low of 6.6%.

“The European Central Bank and other central banks have been torn between the need to crush inflation and their realization that recession risks continue to increase,” said Willem Sales, chief global investment officer at HSBC.

“Gas prices have been rising sharply, and we know that the ECB is concerned that higher inflation will raise wage demands, which could make inflation pressures more persistent. Monetary policy is acting with delays, and ECB governors may have judged that it is better to raise prices. Front loading and finish hiking by the end of the year.”

“Bond and equity markets have responded with some concern: Higher interest rates will increase borrowing costs in peripheral countries and tighten financial conditions, which could deepen the recession,” Sales added.

The pan-European Stoxx Europe 600 was down 0.42% after the announcement, after this morning’s.

Sales said that any rise in the euro would not be sustainable given the expected rise in interest rates from the Federal Reserve and the Bank of England, the higher cost of debt, a possible recession, the upcoming Italian elections, and geopolitical risks.

Thursday’s rate hike keeps the European Central Bank below its “neutral” rate between 1% to 2%.

Konstantin Witt, portfolio manager at investment firm Pimco, He told CNBCIt is now “uncontroversial” within the Frankfurt-based institution to reach that scale before the end of the year, Squawk Box Europe’s Squawk Box Europe said Thursday.

Now the “more interesting” question, he said, is what is the “final rate” – the highest point – during this hiking cycle.

Markets will now be looking for clues as to whether it will move above the neutral range into tight territory.

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