European Central Bank hikes interest rates, fuelling recession fears

ECB chief Christine Lagarde notes concerns but warns of further hikes to tackle soaring eurozone inflation

The European Central Bank has increased the cost of borrowing to tackle inflation, which soared across the eurozone last month to 9.9%.

Matching financial market expectations, the ECB’s 25-member governing council raised the deposit rate by three-quarters of a point to 1.5% – the joint fastest rise in the eurozone’s history.

Pledging to bring inflation back down to 2%, the ECB president, Christine Lagarde, said she was nevertheless concerned by a looming recession across the 19-member currency bloc, sending a strong signal that future rate rises would be muted.

Investors have bet that the deposit rate, which governs the borrowing costs passed on by commercial banks, is expected to peak at 3% next year as the German, Italian, French and Spanish economies contract.

Asked about the concerns of political leaders that rocketing interest rates would hit growth, Lagarde said she was aware of the potential harm to poorer households from a recession and was also anxious about the effect of inflation on those most vulnerable to high prices.

Lagarde said inflation remained far too high and would stay high for an extended period, so further ECB rate hikes should be expected. “We are not done yet. There is more ground to cover,” she said.

Carsten Brzeski, the global head of macroeconomics at the Dutch banking group ING, said the turnaround in policymaking at the central bank represented a “paradigm change” from last year when Lagarde gave a tough defence of looser monetary policy.

“In slightly more than three months, the ECB has now hiked interest rates by a total of 2 percentage points,” he said. “It’s the sharpest and most aggressive hiking cycle ever.”

Lagarde said the ECB had put on hold plans to begin selling some of the €5tn (£4.3bn) of government bonds it held under its quantitative easing programme, many of them issued by the eurozone’s weakest countries. Maturing bonds would continue to be repurchased by the ECB, she said.

Italy’s new prime minister, Giorgia Meloni, said this week that increases in interest rates were punishing households and businesses and were “considered by many to be a rash choice”.

Her remarks followed those of the French president, Emmanuel Macron, who complained about central banks “smashing demand” to tackle inflation, which is only 5.6% in France.

The ECB’s critics have asked why the central bank is raising rates during a long and damaging war in Ukraine and when the economic outlook is already showing growth in gross domestic product turning negative.

Other central banks have been asked the same question, including the Bank of England, which is expected to push its base rate to 5% in 2023.

The US Federal Reserve raised its rates by three-quarters of a point for the third consecutive time last month to a range of 3% to 3.25%. It is expected to raise them again at its next committee meeting in two weeks’ time.

Inflation in the US is near 40-year highs of 8.2%, fuelled in part by stronger growth and more pandemic support spending than in Europe.

The ECB foresees inflation in the eurozone falling to 2.3% by the end of 2024.

Contributor

Phillip Inman

The GuardianTramp

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