by Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank (ECB) on Thursday raised interest rates by an unprecedented three-quarters of a point and said it expects further hikes in the coming months, prioritizing the fight against the inflation despite the risk of a recession in the euro zone this winter.
Faced with a price increase approaching 10%, unheard of for more than 40 years, the monetary authorities fear that inflation expectations will rise for a long time, which could trigger a particularly dangerous price-wage loop by undermining household savings.
After the half-point increase in key rates decided in July, the ECB therefore raised the rate on its deposit facility, which was negative a few weeks ago, to 0.75% and its refinancing rate to 1.25%, at their highest level since 2011. And further increases are to be expected in October as in December.
“We still have a long way to go”, warned the president of the institution, Christine Lagarde, during a press conference, adding that the decision taken this Thursday to “accelerate” the raising of the rates had been unanimously by the members of the Board of Governors.
However, these diverged in recent weeks between the hypothesis of a rise of 50 basis points and that of a rise of 75 points, but the announcement of a new acceleration in prices seems to have tipped the balance in favor of the second.
Inflation in the euro zone indeed reached 9.1% in August according to Eurostat’s first estimate published last week and so-called core inflation, at 4.3%, is more than twice the ECB target, a sign that soaring energy prices are gradually spreading to the rest of the economy.
The ECB has also revised its inflation forecast upwards, saying it now expects prices to rise by 8.1% this year, 5.5% next year and 2.3% in 2024, while by reducing its growth forecasts.
75-POINT RISE IS NOT BECOME THE STANDARD, SAYS LAGARDE
The Governing Council’s statement said that it “plans to continue to raise interest rates in its forthcoming meetings in order to dampen demand and avoid the risk of a persistent upward slide in expectations of inflation”, without going so far as to mention the possible magnitude of future increases.
Asked about this, Christine Lagarde clarified: “We did not say ‘increase by 75 (basis points)’ as if 75 was the norm; it is not.”
Gurpreet Gill, head of macro strategy at Goldman Sachs Asset Management in London, said: “Today’s sharp rate hike is a response to the recent upside inflation surprise and deteriorating bullish outlook for inflation. ‘inflation”.
“The central bank seems to think that a deceleration in growth, which it expects below 1% in 2023, will not be enough to rein in inflation and that it is more prudent to tighten policy sharply to prevent further anchoring of inflation.”
On the foreign exchange market, the euro lost ground at 0.9969 dollars and the main stock market indices in the euro zone fell at 2:30 p.m. GMT: the EuroStoxx 50 lost 0.19% and the CAC 40 in Paris 0.1% .
Bank stocks, whose margins tend to benefit from a rise in key rates, were nevertheless up 2.75%.
At the same time, government bond yields benefited from the ECB’s announcement that member states’ deposits with their national central banks would be remunerated at the level of the deposit rate, a measure aimed at reducing tensions in the bond markets. .
The ten-year German yield took more than 10 basis points to 1.676% and its French equivalent rose to 2.23%.
(Report by Francesco Canepa and Balazs Koranyi, French version by Marc Angrand, edited by Nicolas Delame and Jean-Stéphane Brosse)
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