ECB hikes interest rates by 75 basis points

The European Central Bank lifted interest rates on Thursday by an unprecedented 75 basis points as it looks to tackle surging inflation.

The Bank lifted the key interest rate to 1.25%, as widely expected, and the deposit rate to 0.75% from zero.

It also said it now expects inflation to average 8.1% this year, 5.5% in 2023, and 2.3% in 2024. In the year to August, eurozone inflation rose to a record high of 9.1% from 8.9% a month earlier, with energy prices up a whopping 38.3% year over year.

In addition, the Bank slashed its economic growth expectations for the bloc in 2023 to 0.9% from 2.1%.

"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 said. The Bank said it "expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period".

ING economist Carsten Brzeski said: "With today’s decision, it is clear that the ECB has given up on inflation targeting and forecasting and has joined the group of central banks focusing on bringing down actual inflation. It’s not so much a new strategy based on conviction but rather a strategy based on missing alternatives. We still can’t see how monetary policy can bring down inflation that is mainly driven by (external) supply-side factors.

"Even the impact of policy rate hikes on inflation expectations is anything but certain. At the same time, the size of today’s rate hike will not determine whether or not the eurozone economy slides into recession and will also not make the recession more or less severe. Any recession in the eurozone in the winter will be driven by energy prices and not by interest rates."