The European Central Bank raised interest rates by three-quarters of a percentage point on Thursday, predicting more hikes as it tackles inflation.
This move will bring the reference rate for the 19 countries that use the euro to 1.5%. The central bank has now raised rates at three consecutive meetings by a combined 2 percentage points in a bid to control inflation as a recession looms.
“Inflation remains very high and will remain above target for a long time,” the ECB said in a statement. “Over the past few months, rising energy and food prices, supply constraints and post-pandemic demand recovery have led to increased price pressures and increased inflation,” he added.
The annual inflation rate in the Eurozone had a record of 9.9% in September, 9.1% in August. The bloc is also struggling with weak economic growth.
The energy crisis, caused by Russia’s invasion of Ukraine, has weighed heavily on sectors such as manufacturing. At the same time, a wider cost-of-living crisis has affected spending on goods and services.
According to a gauge of activity in the manufacturing and services sector published on Monday, the eurozone’s economic recession deepened in October. Germany has reported the sharpest economic contraction, while growth in France has stalled, S&P Global’s Purchasing Managers’ Index showed.
Chris Williamson, head of business economics at S&P Global, said the downturn was likely to accelerate towards the end of the year, despite recent declines in energy prices.
“Although the rising cost of living remains the main cause of the economic slowdown, the energy crisis in the region remains a major concern and a drag on activity, especially in energy-intensive sectors,” he added.
Carsten Brzeski, chief economist at ING Germny, said the ECB has embarked on “the sharpest and most aggressive hiking cycle ever”.
“In the current moment of recession and high uncertainty, normalizing monetary policy is one thing, but moving into restrictive territory is another. With today’s rate hike, the ECB is very close to the point where normal could become restrictive,” he wrote in a research note.
— This is a developing story and will be updated.