Euro Area: ECB hikes rates by 75 basis points in September

Euro Area Monetary Policy September 2022

Euro Area: ECB hikes rates by 75 basis points in September

At its 8 September meeting, the European Central Bank (ECB) hiked the main refinancing operations, the marginal lending facility and the deposit facility by 75 basis points each to 1.25%, 1.50% and 0.75%, respectively. The increase, which matched market expectations, takes rates to the highest level since 2011.

The decision to hike rates vigorously was driven by surging inflation despite greater recession risks. Inflationary pressures have continued to mount as the fallout from Russia’s invasion of Ukraine hits trade and supply chains, pushing up energy and commodity prices. Moreover, price rises have broadened as higher energy and production costs filter through to core consumer prices. The Bank sees inflation averaging 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024. Meanwhile, it expects GDP to expand 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

The Bank’s guidance pointed to additional tightening, although its mention of current frontloading suggests a softer pace of normalization. The Bank stated that it expects to deliver further hikes “over the next several meetings” and that decisions will be “data-dependent and follow a meeting-by-meeting approach”, which means that the timing and size of such hikes will be contingent on the evolution of prices and the inflation outlook.

Commenting on the ECB’s decision, Carsten Brzeski, global head of macro at ING, noted:

“The question remains whether the ECB would really be willing to continue hiking as aggressively as they are suggesting if the recession becomes reality. Hiking into a recession is one thing, hiking throughout a recession another.”

The next monetary policy meeting is scheduled for 27 October.

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