The European Central Bank (ECB) raised interest rates by an unprecedented 75 basis points (bps) and targeted further hikes, prioritizing fighting inflation even as the economy heads into a recession in winter.
With inflation running at 9.1% and approaching double digits, ECB leaders are concerned that rapid price growth will take hold, erode the value of household savings and trigger a difficult price-wage spiral. to break.
Following the July rate hike, the ECB raised its deposit rate from zero to 0.75% and increased its main refinancing rate to 1.25%, the highest levels since 2011, with further increases expected in October and December.
This important step advances the transition from the current level, with high flexibility of interest rates, to levels that guarantee the timely return of inflation to the ECB’s 2% medium-term target,” the central bank said in a statement.
“In the next meetings, the Governing Council plans to increase rates even more to curb demand and protect itself from the risk of a persistent change in inflation expectations to the upside”, he added.
Inflation expectations rise
Christine Lagarde, president of the ECB, warned that medium-term inflation may end up being higher than expected and with a deterioration in production capacity, further increases in energy and food prices, as well as an increase in expectations of inflation and wage increases.
In fact, the ECB once again raised its inflation forecasts to 8.1% this year, compared to the 6.8% projected in June, and stated that the phenomenon will continue “very strong” for a long time.
For 2023, he raised his outlook from 3.5 to 5.5% and in 2024 he placed it at 2.3%, still above his goal of 2 percent.
“However, if energy prices decline or demand weakens in the medium term, the pressure on prices would ease,” Lagarde said.
The ECB President defended her team’s economic forecast, adding that international institutions also made mistakes because it was “virtually impossible” to anticipate the pandemic, the war in Ukraine and Russia’s energy blackmail.
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