European Central Bank increases interest rates by 0.75%
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The European Central Bank has taken its most significant step yet to address historic levels of inflation as it raised interest rates by 75 basis points yesterday, its largest ever single increase.
The move brings the ECB's deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011. The increase was widely expected and is part of a series of hikes that are planned as the central bank attempts to contain soaring inflation which has reached a half-century high of more than 9%.
"This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target," the ECB President Christine Lagarde said.
ECB staff have also significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.
"After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023," she said.
"Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity.
European Central Bank President Christine Lagarde staunchly defended her staff's economic forecasting on Thursday, pointing out that some major factors such as the pandemic and Russia's invasion of Ukraine are all but impossible to forecast.
She said most international institutions and economists also made forecasting errors because "it's virtually impossible to actually anticipate and include in your models COVID, the war in Ukraine, the energy blackmail".
"So while I take the blame because I am the head of the institution and yes, we made forecasting errors, but those errors were made by all forecasters. We are not very different from them," she said.
The ECB has taken some flak over the last year for its low forecasts for inflation in particular, which has taken off in recent months amid the energy crisis stemming from the war in Ukraine.
Additional reporting Reuters