ECB lifts rates by 50 basis points; outlook hawkish

The European Central Bank hiked interest rates on Thursday by 50 basis points, as expected, in the face of surging inflation.

The deposit and refinancing rates were lifted to 2.00% and 2.50%, respectively.

The Bank said that based on "the substantial upward revision to the inflation outlook", it expects to raise them further.

"In particular, the Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target," it said.

The Bank now expects inflation in the eurozone of 6.3% next year, 3.4% in 2024 and 2.3% in 2025. It expects the economy to grow by 3.4% this year, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025.

Eurozone inflation dropped to 10.0% in November from a record high of 10.6% in October.

The ECB followed in the footsteps of both the US Federal Reserve and the Bank of England.

Earlier, the BoE announced its ninth rate hike in a row, raising rates by 50 basis points to 3.5% - the highest level since the financial crisis in October 2008.

The Swiss National Bank lifted its key policy rate by 50 basis points to 1.00%, in line with expectations, while Norway's central bank upped its benchmark interest rate by 25 basis points to 2.75%, also as expected.

On Wednesday evening, meanwhile, the Fed also bumped rates up by 50 basis points, as expected. Although this marked a slowdown in hikes, with the Fed having lifted rated by 75 basis points at each of its last four policy meetings, the central bank also adjusted up its expectations for rate rises next year.

The European Central Bank also said it will start to reduce its bond portfolio from March 2023 onwards. The reinvestments of maturing bonds under the asset purchase programme portfolio will decline to €15bn per month on average until the end of the second quarter of next year. The subsequent pace "will be determined over time", it said.

ING said: "All in all, the ECB’s crusade to not only fight inflation but to fight against any deterioration in its reputation and credibility continues. There is still very little the ECB can do to bring down actual inflation but it can contribute to re-anchoring inflation expectations.

"With today’s announcement, it is clear that the ECB wants to first fully exploit interest rates as the main instrument to fight inflation and that the balance sheet reduction will stay on the back burner. Needless to say that with the still relatively optimistic growth outlook, the risk increases that the ECB pushes the eurozone economy further into recession with every new rate hike."