European Central Bank announces new super hike of interest rates to tame inflation - Euronews

The European Central Bank (ECB) has announced a new jumbo hike of interest rates in a bid to bring down record inflation in the eurozone.

The bank's three key interest rates were each bumped by three-quarters of a percentage point, the same as they did in September.

The central bank's interest rates have a cascading effect across the eurozone and directly influence the rates that commercial banks offer to households and businesses.

Mortgages, car loans and credit cards will become more expensive and less attractive as a result.

Governments will have to make higher payments for their national debt, worsening their public deficits.

Average debt in the eurozone stood at 94.2% of GDP at the end of the second quarter, with Greece (182.1%), Italy (150.2%) and Portugal (123.4%) topping the list.

The decision to raise interest rates was confirmed on Thursday afternoon, following days of speculation around the size of the increase, and will take effect on 2 November. It marks the third hike this year for the 19 EU countries that use the euro.

Inflation 'far too high'

The ECB "expects to raise interest rates further" and will base its future moves on the "evolving" economic outlook, the organisation said in a statement after a meeting of the Governing Council.

"Inflation remains far too high and will stay above the target for an extended period," it noted.

Like other central banks around the world, the ECB is taking action to make spending more costly for both consumers and companies in order to bring down soaring prices.

But the fight against inflation is expected to be painful. High-interest rates can constrain demand, investment and hiring, causing the economy to slow down.

The ECB appears determined to push through these concerns and fulfil the bank's central mandate of price stabilisation, a goal that the Ukraine war and the energy crisis have turned into an uphill struggle.

Annual inflation in the eurozone reached 9.9% in September, an all-time high figure and almost five times the 2% target pursued by the ECB. The three Baltic countries showed inflation rates beyond the 20% mark.

The upward trend initially affected energy bills but has now spread over food, alcohol, industrial goods and services.

ECB President Christine Lagarde told reporters that economic activity in the eurozone likely "slowed significantly in the third quarter of the year and we expect a further weakening in the remainder of this year and beginning of next year."

Additionally, "demand for services is slowing after a strong performance in previous quarters" and surveys show that "new orders in the manufacturing sector are falling", she added.

The labour market, which has so far proved resilient and is now at a historically low level of 6.6%, could also start to be impacted with Lagarde warning of "somewhat higher unemployment in the future."

Reservations about raising interest rates

In her first speech before lawmakers, Italy's new prime minister, Giorgia Meloni, criticised the ECB's successive hikes of interest rates, arguing they "have created additional difficulties for those member states which, like us, have a high public debt."

Meloni also spoke of "rash" choices made by the Frankfurt-based bank.

The issue of debt reduction is at the core of an ongoing review of the EU's fiscal rules, which remain suspended since the outbreak of the COVID-19 pandemic.

French President Emmanuel Macron, whose country carries a 113% debt ratio, has also expressed reservations about rising interest rates.

"I'm concerned to see lots of experts and certain European monetary policymakers explaining to us that we need to break demand in Europe to better contain inflation," Macon told a national newspaper.

Lagarde brushed off the criticism when specifically asked about it on Thursday, arguing that "we have to do what we have to do."

"A central bank has to focus on its mandate. Our mandate is price stability and we have to deliver that" using the "tools that are most appropriate and most efficient," she went on.

She stressed that the central bank is not "oblivious to the risk of recession" but that under the current circumstances "the decision we made today is the most appropriate".

The ECB is an independent institution from member states and is only accountable before the European Parliament, shielding it from political interference.

The next monetary meeting of the bank's governing council is scheduled to take place on 15 November, with a fresh hike of interest rates on the table.

The last time interest rates were so high in the eurozone was 2008, when the ECB tightened its policy to fight the financial crisis. The move, however, backfired and was quickly reversed.

In the following years, the eurozone experienced a rapid decline in interest rates until reaching negative territory. It wasn't until July 2022 that rates were brought back to positive levels.

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2022-10-27 14:15:00Z
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