Thursday

29th Sep 2022

European Central Bank hikes interest rate by 0.75 percent

  • The ECB's headquarters, in Frankfurt (Photo: ECB/Flickr)
Listen to article

The European Central Bank (ECB) has raised interest rates by 0.75 percent, the largest single increase since its founding in 1998, which as a consequence brings the base interest rate for banks up to 0.75 percent.

"The governing council took today's decision and expects to raise interest rates further because inflation remains far too high," bank president Christine Lagarde told press on Thursday (8 September).

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

According to Eurostat estimates, average EU inflation hit 9.1 percent this month, the highest in 40 years, and pressure to take major action intensified in the past few weeks.

But the bank is in a difficult position. Economic sentiment in Europe is now lower than on the eve of the financial crisis in 2009, suggesting a winter recession is likely.

Increasing borrowing costs now may exacerbate that economic downturn, but the ECB expects inflation may rise further in the near term, and it has a mandate to bring it down to two percent.

Calls for monetary tightening are also fuelled by the fact that the eurozone economy has not yet entered recession, and the jobless rate is at a record low of 6.6 percent.

"We shouldn't delay further rate hikes for fear of a possible recession," German chief central banker Joachim Nagel said last week, a call supported by Dutch central banker Klaas Knot.

This time the logic is driven by the belief that a jolt to the system by "front-loading" interest rates just ahead of a full-blown crisis will stabilise prices, which will be "cheaper" in the long run, Nagel said.

But demand is already collapsing without the input of Europe's central bank. "Very high energy prices are reducing the purchasing power of people's incomes and they are still constraining economic activity," the ECB wrote in a statement.

According to Goldman Sachs, a typical European household may spend as much as €500 monthly on energy bills next year, a tripling of last year's prices.

Real negotiated wages in 2022 have dropped 6.5 percent on average in the Eurozone, 8.1 percent in Spain, 7.5 percent in the Netherlands and Italy.

The ten-percent of poorest households in the United Kingdom are projected to spend 50 percent of their income on energy.

Although the ECB still expects the European economy to grow by 0.9 percent, if Russia cuts off all gas supply the bank actually projects a recession for 2023.

As it is, disposable income is dropping much faster than during the height of the 1970s stagflation, a period of low growth and high inflation, which the current moment is often compared with. Tightening the money supply will dampen wages even further.

Vitor Constâncio, a former ECB vice-president, told Italian newspaper La Stampa that the 75-basis-point increase is a "risky mistake" because of the likely chance the European economy will enter a recession before the end of the year.

David Malpass, president of the World Bank, said rate hikes are also ill-suited to address current inflation, which is driven mainly by exorbitant energy prices — a point ECB president Christine Lagarde has repeatedly made in the past.

"I cannot reduce the price of energy. I cannot convince the big players to reduce gas prices," Lagarde also said to this effect on Thursday. "Monetary policy is not going to reduce the price of energy."

Supporting the decision to go for a big rate hike are the large stimulus measures announced by the eurozone governments to protect households and businesses against high energy prices.

Germany has announced €65bn in support measures, the Netherlands €16bn. The assumption is these investments will fuel demand and increase inflation, but many of the proposals now on the table will limit the price of energy or gas, which would reduce overall inflation.

Hiking rates at this time increases the cost of these interventions, which will be felt especially hard by weaker economies.

Greece is spending 3.7 percent of its annual economic output on support measures for households and businesses, the highest of any EU country, according to Brussels-based Bruegel.

Tellingly, Greek Central Bank governor, Yannis Stournaras, was one of the last governing council members to urge "gradual" rate rises to "ensure a soft landing" for the economy.

The bank's council will meet again on 27 October.

Analysis

Can the ECB solve climate change and inflation on its own?

The European Central Bank operates independently - with good reason - but in cases like climate policy more coordination with democratic authorities are needed, two influential economists have argued.

Interview

'We need different tools to deal with inflation'

Instead of suppressing the entire economy to tackle inflation, the economist Isabella Weber says a less damaging way to address it is by directly controlling the price of essential resources — like gas and energy.

News in Brief

  1. EU takes Malta to court over golden passports
  2. EU to ban Russian products worth €7bn a year more
  3. Denmark: CIA did not warn of Nord Stream attack
  4. Drone sightings in the North Sea 'occurred over months'
  5. Gazprom threatens to cut gas deliveries to Europe via Ukraine
  6. New compromise over EU energy emergency measures
  7. 15 states push for EU-wide gas price cap
  8. EU: Nord Stream explosions 'result of a deliberate act'

Stakeholders' Highlights

  1. The European Association for Storage of EnergyRegister for the Energy Storage Global Conference, held in Brussels on 11-13 Oct.
  2. EFBWW – EFBH – FETBBA lot more needs to be done to better protect construction workers from asbestos
  3. European Committee of the RegionsThe 20th edition of EURegionsWeek is ready to take off. Save your spot in Brussels.
  4. UNESDA - Soft Drinks EuropeCall for EU action – SMEs in the beverage industry call for fairer access to recycled material
  5. Nordic Council of MinistersNordic prime ministers: “We will deepen co-operation on defence”
  6. EFBWW – EFBH – FETBBConstruction workers can check wages and working conditions in 36 countries

Latest News

  1. Everything you need to know about the EU gas price cap plan
  2. Why northeast Italy traded in League for Brothers of Italy
  3. How US tech giants play EU states off against each other
  4. Deregulation of new GMO crops: science or business?
  5. The European shipping giants plying Putin's fossil-fuels trade
  6. Russian ideologue and caviar on latest EU blacklist
  7. Netherlands tops EU social safety net for the poor
  8. New EU rules to make companies liable for their AI failures

Join EUobserver

Support quality EU news

Join us