The euro sign is seen at European Central Bank headquarters in Frankfurt, Germany. The ECB said it will raise interest by 0.75 percentage point on Thursday. File Photo by Canadastock/Shutterstock/BP
Sept. 8 (BP) — The European Central Bank on Thursday raised its three key interest rates by three-quarters of a percentage point in an effort to balance inflation concerns and fears of rising energy costs.
The increase marks the biggest increase the bank has made to interest rates since its earliest days in the late 1990s.
The bank made the announcement during its meeting in Frankfurt, Germany. The ECB’s increase, its second in 2022, comes on the heels of several increases by the Federal Reserve in the United States as an effort to address red-hot inflation. In July, the ECB raised rates 50 bases point to 0%.
“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 bank said in a statement.
“Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”
The bank said it would re-evaluate its policy path in light of incoming information and the evolving inflation outlook over the next year. The ECB blamed soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks for peaking inflation.
“According to Eurostat’s flash estimate, inflation reached 9.1% in August,” the bank said. “Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.”
Inflation expectations were revised to 8.1% for 2022, 5.5% in 2023 and 2.3% in 2024.
The ECB said after a rebound in the first half of 2022, there has been a slowdown in euro area economic growth, with the economy expected to stagnate for the rest of 2022 and in the first quarter of 2023.
Russia’s war in Ukraine, where Moscow has responded to sanctions by slowing energy supplies to Europe is playing havoc with the economy. The ECB said very high energy prices are reducing the purchasing power of people’s incomes.