ECB Unveils Record Hike in Interest Rates; Signalling Substantial Euro Region Slowdown in Next 2 Years

The European Central Bank (ECB) unleashed a record interest rate hike on Thursday as it battles runaway inflation. All three key interest rates were raised by 75 basis points, or 0.75 percentage points, which is a bigger hike than ever.

"This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB's 2% medium-term target," ECB said in a statement.

European Central Bank
European Central Bank Wikimedia Commons

More Hikes to Follow

Significantly, ECB said it would raise rates further over the next several sessions "to dampen demand and guard against the risk of a persistent upward shift in inflation expectations."

With the latest hike, ECB's main refinancing rate has gone up to to 1.25 percent from 0.5 percent.

According to ECB President Christine Lagarde, inflation is still predominantly a supply driven-phenomenon 'affected by factors beyond the central bank's control.'

"I cannot reduce the price of energy. I cannot convince the big players of this world to reduce gas prices. I cannot reform the electricity market. And I am very pleased to see that the European Commission is considering steps to that effect because monetary policy is not going to reduce the price of energy," she said.

Representational image pixabay

The rate hike will invariably result in a dampening of economic growth across the region. However, for ECB, fighting inflation remains one of the top priorities. Across the Eurozone, inflation hit a record 9.1 percent in August, driven largely by a surge in energy prices.

According to the Frankfurt institution, economic growth in the region will be 3.1 percent this year, but will substantially slow down to 0.9 percent next year and 1.9 percent in 2024.

The Institution says the slowdown will happen because of "very high energy prices" that disrupts supply chains and constraining economic activity.