The ECB undertakes the largest-ever interest rate hike to contain inflation

The European Central Bank (ECB) on Thursday raised interest rates by three-quarters of a percentage point to 1.25 %, the largest increase in history, to curb inflation in the euro area, which soared in August to 9.1 %. 

Following the meeting of the Governing Council, the ECB reported that it also increased by 75 basis points the credit facility, at which it lends to banks overnight, to 1.50 %, and the deposit facility, at which it remunerates excess overnight reserves, to 0.75 %. 

"This important step anticipates the transition from the current very accommodative level of policy rates towards levels that will ensure a timely return of inflation to the ECB's medium-term objective of 2 %," the central bank said in a statement.   

The Governing Council expects to raise interest rates at upcoming meetings to dampen demand and guard against the risk of a persistent rise in the inflation outlook.  

The Governing Council will regularly reassess its policy path in the light of new information and developments in the inflation outlook, and its interest rate decisions will continue to be data-driven. 

The ECB will take decisions at each meeting and makes clear in the statement that it "expects to raise interest rates again, because inflation remains excessively high and is likely to remain above target for an extended period".   

Inflation is rising in the euro area because of strong energy and food price increases, demand pressures in some sectors due to the reopening of the economy, and supply bottlenecks, it adds. 

The ECB acknowledges "a substantial slowdown in euro area growth", and expects "a stagnation of the economy in the last months of the year and in the first quarter of 2023". 

Following the increase in the deposit facility rate above zero, the two-tranche system for the remuneration of excess reserves is no longer necessary. Accordingly, the ECB adds in the statement, the Governing Council decided today "to discontinue the two-tranche system by setting the multiplier at zero". 

The Fed, for its part, raised interest rates by three quarters of a point in both June and July to try to control inflation, which it had not done since November 1994, when, under Alan Greenspan, the US central bank implemented a series of rate hikes to try to prevent a runaway rise in prices.