UPDATE 2 - European Central Bank opts for historic rate hike amid surging inflation

UPDATES WITH REMARKS FROM EUROPEAN CENTRAL BANK GOVERNOR

By Aysu Bicer

ANKARA (AA) – The European Central Bank (ECB) on Thursday hiked its three key rates by 75 basis points each in a historic move as eurozone inflation faces a record-high and war-driven energy crisis, creating new risks for the entire region.

"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 1.25%, 1.50% and 0.75%, respectively," the bank said in a statement.

July was the first time in over a decade that the bank raised rates by 50 basis points as annual inflation in the euro area spiked to 8.6% in June, far above the ECB's 2% target.

Euro area annual consumer inflation jumped to a new record high of 9.1% in August.

"Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation," the bank explained.

It warned that price pressures have continued to broaden across the economy, signaling further interest rate increases in the coming period, as "inflation remains far too high, likely to stay above target for an extended period."

Markedly revising up inflation projections, it now expects an 8.1% average in 2022 and 5.5% in 2023.

The bank also raised its eurozone growth forecast to 3.1% in 2022, while diminishing it to 0.9% in 2023 and to 1.9% in 2024.

"After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023," the bank said.

"Very high energy prices are reducing the purchasing power of people's incomes and, although supply bottlenecks are easing, they are still constraining economic activity," it added.

The bank also said the Russia-Ukraine war was weighing on the confidence of businesses and consumers.

- Rate hikes continue

Following the historic interest rate decision, Christine Lagarde, the bank's governor, emphasized that the interest rate hike will continue. "We can probably raise rates in more than two meetings."

She said that the Governing Council unanimously decided to raise the three ECB rates by 75 basis points each.

"We are dependent on data and we decide meeting-by-meeting," she said.

Energy, of course, is still the biggest source of inflation with an annual increase of 38%, she underlined, adding, but there is inflation that spreads across sectors where supply factors are less and where demand plays a role.

Regarding the recession concerns, Lagarde said there is no contraction in 2023 in the bank's base scenario. However, she added that in the case of the full shutdown of the Russian gas to Europe, the bank predicts a contraction.

With the slowdown in the global economy, the risks to growth are on the downside, especially in the short term, Lagarde said, adding: "The prolonged war in Ukraine continues to be a huge risk for growth."