ECB delivers record 75-basis-point hike as inflation spirals

The European Central Bank raised interest rates by 75 basis points and noted further hikes are to come as the bank battles to keep rising inflation under control.

The ECB's governing council delivered a 75-basis-point hike across each of its three key interest rates, in what ECB President Christine Lagarde said in a news conference is a major step that "frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation" to a 2% target.

The interest rate on the main refinancing operations, marginal lending facility and deposit facility will rise to 1.25%, 1.5% and 0.75%, respectively. The rises are effective Sept. 14.

Ms. Lagarde said the council expects to raise rates further over the next several meetings of the governing council "to dampen demand and guard against the risk of a persistent upward shift in inflation expectations." Eurozone inflation reached 9.1% in August according to Eurostat's flash estimate, she said. In June, eurozone inflation was 8.6%. The ECB expects inflation to average 8.1% this year, 5.5% in 2023 and 2.3% in 2024 — still above its 2% medium-term target.

The September hike follows a 50-basis-point rise in interest rates delivered in July, which was the ECB's first upward move in its monetary policy in more than a decade.

The latest rise, along with the expectation for further hikes, is "because inflation remains far too high and is likely to stay above target for an extended period," Ms. Lagarde said.

Recent data point to a substantial slowdown in eurozone economic growth, with the expectation of stagnation later in the year and in the first quarter of 2023, Ms. Lagarde said. High energy prices and the adverse geopolitical situation — "especially Russia's unjustified aggression towards Ukraine" — were cited as contributing to pressures on the region's economy.

The ECB expects the eurozone economy to grow by 3.1% this year, 0.9% next year and 1.9% in 2024.

The 75-basis-point hike is the largest in the eurozone's history, Seema Shah, chief global strategist at Principal Global Investors, noted in a comment. The hike "comes despite the oncoming recession and is testament to the enormity of the inflation challenge facing the central bank," with spiraling inflation forcing the ECB's hand, she said.

Gurpreet Gill, macro strategist-global fixed income at Goldman Sachs Asset Management, said the ECB "appears to believe a deceleration in growth — which is projected to drop to below 1% in 2023 — will be insufficient to alleviate inflation and that it is prudent to tighten policy forcefully to prevent inflation becoming more entrenched."