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ECB lift its interest rates by 0.75% in the battle to curb inflation

 (AFP via Getty Images)
(AFP via Getty Images)

The European Central Bank raised interest rates across the Eurozone by 0.75% today increasing the pressure on the Bank of England to follow suit next week.

The ECB - the central bank for the world’s biggest economic bloc - said the move was needed because “inflation remains far too high and will stay above the target for an extended period.” It was in line with economists’ forecasts.

In a statement ECB warned that further hikes in the cost of borrowing are expected, increrasing the risk of the Eurozone - the UK’s biggest trading partner - plunging into a deep recession.

It is the ECB’s third big move at successive meetings of its Governing Council. The ECB raised interest rates by 0.5% in July and then by another 0.75% in September.

The Governing Council of the ECB the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 2.00%, 2.25% and 1.50% respectively, with effect from 2 November 2022.

It said it “stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term.”

In a statement the ECB, headed by its Presdient Christine Lagarde, said: “In September, euro area inflation reached 9.9%. 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. The Governing Council’s monetary policy is aimed at reducing support for demand and guarding against the risk of a persistent upward shift in inflation expectations.”

Jeremy Batstone-Carr, European Strategist at Raymond James, said: “The European Central Bank (ECB) is between a rock and a hard place as it looks to control inflation without tanking the economy, and has decided that potentially tipping the region into a recession is a necessary evil in order to control spiralling inflation.

“The Eurozone is facing challenges that will be familiar to much of the rest of the world, with headline regional inflation running at a year-on-year rate of 10%, five times the target level.

In response the ECB has raised its base interest rate by a further 0.75 points as it prioritises its core mandate of ensuring price stability. However, the attempt to cushion the blow to households and businesses from rising costs is likely to create issues elsewhere by imparting a marked downward pressure on economic activity by dramatically increasing the cost of borrowing.”