The ECB lifted its deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.
“Over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations,” the ECB said in a statement.
The move comes after weeks of canvassing by policymakers, with a seeming majority making the case for a 75 basis-point hike and a few policy doves trying to downgrade expectations.
Markets, however, sided with the conservatives and priced in an 80% likelihood of a 75 basis-point move, even as economists polled by Reuters were more evenly split, showing only a slight majority expecting the larger move.
The large hike comes as the ECB increased its own inflation forecasts and continues to see price growth well above its 2% target throughout its entire projection horizon.
“ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024,” the ECB added.
Conservatives feared that anything but an oversized move would signal that the ECB was not serious about its inflation-fighting mandate. That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB.
Timid action would have also weakened the euro, boosting inflation through more expensive energy imports.
Frontloading the rate hikes also allows the ECB to get most of the work done before the recession sets in.
Attention now turns to ECB President Christine Lagarde’s 1245 GMT news conference.
Source: Economy - investing.com
