ECB hikes interest rates again amid recession fears

The European Central Bank (ECB) increased its key interest rate by a further 75 basis points on Thursday as the eurozone struggles with runaway inflation.

"Inflation remains far too high and will stay above the target for an extended period," the bank said in a statement.

Eurozone government bond yields fell following the ECB's statement.

'Further rate increases' expected

ECB President Christine Lagarde said there was still ground left to cover, adding the central bank would "have further rate increases in the future" to bring down record-high inflation.

"We are not done yet. There is more ground to cover," Lagarde said.

"In the present state of uncertainty, with the likelihood of recession looming much more on the horizon and the probability of it having increased, everyone has to do their job," she added. "Our job is price stability. This is our primary mandate and we are riveted to that."

The hike is the second such move by the ECB in recent months and matches a three-quarters of a percentage point increase last month. The ECB has now raised rates for the 19-country eurozone by 2 percentage points in just three months — this is the fastest set of increases in the history of the euro.

The interest rate increases aim to dampen spending by increasing the cost of borrowing in hopes of bringing down rising costs of essential goods such as food and energy.

Inflation in the eurozone was at around 10% in September, five times higher than the 2% maximum target.

Recession fears

Government spending during the coronavirus pandemic and the subsequent Russian invasion of Ukraine are seen as the main culprits for rising prices.

"A long lasting war in Ukraine remains a significant risk," Lagarde said.

"Confidence could deteriorate further and supply side constraints could worsen again. Energy and food costs could also remain persistently higher than expected," she said. "A weakening world economy could be an additional drag on growth in the euro area."

Europe's withdrawal from Russian energy has left several economies in already precarious situations — Germany is expected to watch its economy shrink by 0.4% next year.

Some European leaders have criticized the ECB's decision to increase interest rates, saying that it will pile problems on countries with high debt and that it will torpedo demand — further stoking recession fears.

ECB President Christine Lagarde has said that inflation is "far too high" and called for more steps to be taken. She also warned eurozone members against high government spending that would counter the ECB's attempts to bring inflation back under control.

ab, sdi/sms (AP, AFP, Reuters)