The European Central Bank hiked interest rates by three quarters of a percentage point on Thursday, promising further hikes to come as it tackles rising inflation.
The move will take the benchmark rate for the 19 countries using the euro to 1.5%. The central bank has now hiked rates at three consecutive meetings by a combined 2 percentage points in a bid to get control of inflation even as a recession looms.
“Inflation remains far too high and will stay above the target for an extended period,” the ECB said in a statement. “In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to a broadening of price pressures and an increase in inflation,” it added.
The eurozone’s annual rate of inflation hit a record 9.9% in September, up from 9.1% in August. The bloc is also struggling with weak economic growth.
An energy crisis, sparked by Russia’s invasion of Ukraine, has weighed heavily on sectors such as manufacturing. At the same time, a broader cost-of-living crisis has knocked spending on goods and services.
According to a gauge of activity in the manufacturing and services sector published on Monday, the eurozone’s economic downturn deepened in October. Germany reported the steepest economic contraction, while growth in France stalled, S&P Global’s Purchasing Managers’ Index showed.
Chris Williamson, chief business economist at S&P Global, said that the downturn is likely to accelerate towards the end of the year, despite recent falls in energy prices.
“While the rising cost of living remains the predominant cause of the economic slowdown, the region’s energy crisis remains a major concern and a drag on activity, especially in energy intensive sectors,” he added.
Carsten Brzeski, chief economist at ING Germny, said the ECB has embarked on its “sharpest and most aggressive hiking cycle ever.”
“At the current juncture of a looming recession and high uncertainty, normalising monetary policy is one thing but moving into restrictive territory is another thing. With today’s rate hike, the ECB has come very close to the point at which normal could become restrictive,” he wrote in a research note.
— This is a developing story and will be updated.