The European Central Bank has made the biggest single interest rate rise in its history, highlighting the extent of the fight against inflation at global monetary policy guardians.
Its Governing Council lifted the 19-nation bloc’s key benchmark rate by 0.75% to 1.25% in a unanimous decision. It took rates to their highest level since 2011 after the ECB ended eight years in negative territory with a 0.5% hike in July.
Carsten Brzeski, global head of macro at Dutch bank ING, said: “The ECB did it,” calling the hike “historic”, but also pointed to its limitations: “The size of today’s rate hike will not determine whether or not the eurozone economy slides into recession and will also not make the recession more or less severe. Any recession in the eurozone in the winter will be driven by energy prices and not by interest rates.”
The euro fell in afternoon trade after the announcement, which had increasingly been expected. Having been sitting around parity with the dollar, it cooled as the president of the ECB’s governing council, Christine Lagarde spoke about the decision at press conference in Frankfurt, with a live feed available here. The shared currency was down 0.5% at $0.9943. It fell below dollar parity for the first time in 20 years in July, as investors dumped the shared currency on the outlook for faster rate rises elsewhere and the grim outlook for the bloc’s economy.
Rob Clarry, Investment Strategist at wealth manager Evelyn Partners, said: “ Having been late to the interest rate hiking party, the ECB is now making up for lost time.
“The ECB has acted firmly as it looks to avoid expectations of higher inflation from becoming entrenched. Another crucial reason is to try and halt the Euro’s slide against the US dollar given that this has put further upward pressure on inflation. Fundamentally, it appears that the ECB is taking a similar stance to the Bank of England and the Federal Reserve: tackling inflation at the expense of economic growth.”