ECB hikes rates by 75 basis points

The European Central Bank (ECB) has announced it will be hiking interest rates by 75 basis points, making it the second straight rate increase.

It's the largest rate increase the 25 member governing council of ECB has made in a single session. However, the benchmark rate for lending to banks now stands at just 1.25%, which is still an exceedingly low level by historical standards.

The deposit rate — which is the rate that defines the interest banks receive for depositing money with the central bank overnight — stands at 0.75%.

"The Governing Council took today's decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period," the ECB said in a statement.

Year-on-year inflation in the eurozone stood at 8.9% in July and first predictions for August put the rate tentatively at 9.1%.

ECB joins push to curb inflation

The ECB was rather late to join the US Federal Reserve and other central banks in the global rush to raise rates to combat inflation.

The increase is aimed at raising borrowing costs for consumers, businesses and governments. This theoretically slows spending and investment while taking the heat off of consumer prices by reducing demand for goods.

The ECB, like many other central banks for developed western economies, has consistently held interest rates at or near zero almost without interruption since the so-called financial crash of 2008. The target was to promote economic growth and moderate inflation of around 2%.

For years, these historically low rates barely kept growth positive and did not boost inflation. But global supply disruptions amid the COVID pandemic followed by the war in Ukraine's impact on core product prices such as food and fuel have now combined to push inflation up towards 10%, prompting banks to raise rates to try to rein it back in.

Russia's cutback to supply of natural gas has also driven up prices. Moscow has blamed technical issues for the cuts but has also warned of a complete halt in supplies should price caps on Russian gas and fuel come into effect.

Fighting inflation 'the first priority' — German finance minister

Germany's Finance Minister Christian Lindner has been among the first to respond, saying the decision is a clear indication that "we are economically in an extraordinarily challenging situation."

"The first priority is fighting inflation because otherwise it will wash away our economic foundation," Lindner told Germany's lower house of parliament during a budget debate.

ECB President Christine Lagarde said that rates would continue to be hiked "over the next several meeting" because "inflation remains far too high and is likely to stay above our target for an extended period."

Lagarde highlighted expectations for the remainder of the year, telling reporters "recent data points to a substantial slowdown in euro-area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023."

Economic growth has been revised down markedly for the remainder of the current year and throughout 2023 with expectations for the economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

kb/msh (AP, dpa)