A record 75 basis point rate increase was announced on Thursday by the European Central Bank in an effort to tame runaway inflation, even as a recession now appears increasingly probable as a result of the loss of access to Russian natural gas.
Since 2011, the ECB has raised its deposit rate to 0.75 percent from zero, and its main refinancing rate to 1.25 percent, which is the highest level since 2011, as inflation has become increasingly broad and is at risk of becoming entrenched.
The ECB said, “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.”
With a seeming majority making the case for a 75 basis-point hike and a few policy doves trying to downgrade expectations, the move comes after weeks of canvassing by policymakers.
Policymakers have been canvassing for weeks, with the majority calling for a 75 basis-point hike, and a few trying to lower expectations.
The market, however, sided with the conservatives and priced in an 80 percent likelihood of a 75 basis-point move, while economists surveyed by Reuters were more evenly divided, with only a few expecting a larger move.
In addition to raising its inflation forecasts, the ECB continues to see price growth well above its 2 percent target throughout its entire projection period.
“ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1 percent in 2022, 5.5 percent in 2023, and 2.3 percent in 2024,” the ECB added.
Conservatives feared that anything but an oversized move would signal that the ECB was not serious about its inflation-fighting mandate. That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB.
Timid action would have also weakened the euro, boosting inflation through more expensive energy imports.
Frontloading the rate hikes also allows the ECB to get most of the work done before the recession sets in.