The European Central Bank (ECB) hiked interest rates a whopping 0.75% at its meeting on Thursday in a bid to dampen soaring inflation across Europe.
The ECB warned of higher interest rates to come in its next several meetings as it worked to reign in demand and prevent further persistent upward movement in inflation.
The Bank cited Eurostat’s flash estimate for inflation to hit 9.1% in August as a result of spiking energy and food costs, demand pressures across some sectors due to economic reopening and supply bottlenecks.
The ECB estimated significantly revised inflation expectations of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.
Euro area economic growth is projected to stagnate later in 2022 and into Q1 2023, with energy prices and reduced purchasing power of consumer incomes driving the slowdown.
“The ECB has raised rates by an unprecedented 0.75% in response to the recent surge in inflation, ratcheting up the pace of policy tightening as both the Fed and BOE have done in recent months,” said Kingswood strategist Rupert Thompson.
“It is very much prioritising getting inflation back under control even as the economy looks headed into recession later this year.”
“This move can only add to the pressure on the Bank of England to follow suit with a 0.75% rise next week, particularly with the news today of the Government’s large scale intervention to cap household and business energy bills.”
Meanwhile, the ECB reported expected economic growth of 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.
The Bank also highlighted the lasting impact of the Covid-19 pandemic, which remained a risk to the smooth transition of ECB monetary policy.
European markets were trading down after the interest rates move. The German DAX was down 1.4% to 12,729.4, the French CAC fell 0.8% to 6,056.3 and the Italian FTSE MIB slid 1% to 21,268.1 in early afternoon trading on Thursday.