European Central Bank Imposes Biggest Rate Hike

The European Central Bank made its largest-ever interest rate increase Thursday, following the US Federal Reserve and other central banks in a global stampede of rapid rate hikes meant to snuff out record inflation that is squeezing consumers and pushing Europe toward recession, David McHugh reported for the Associated Press (AP) on September 8, 2022.

Photo Insert: The jumbo increase is aimed at raising the cost of borrowing for consumers, governments, and businesses, which in theory slows spending and investment and cools off soaring consumer prices by reducing the demand for goods.

The bank’s 25-member governing council raised its key benchmarks by an unprecedented three-quarters of a percentage point for the 19 countries that use the euro currency.

The ECB usually moves rates by a quarter-point and had never raised its key bank lending rate by three-quarters of a point since the euro’s launch in 1999.

The ECB’s benchmark is now 1.25% for lending to banks. The Fed’s main benchmark is 2.25% to 2.5% after several large rate hikes, including two of three-quarters of a point. The Bank of England’s key benchmark is 1.75%, and the Bank of Canada on Wednesday raised its benchmark by three-quarters of a point, to 3.25%.

The jumbo increase is aimed at raising the cost of borrowing for consumers, governments, and businesses, which in theory slows spending and investment and cools off soaring consumer prices by reducing the demand for goods.

Analysts say it’s also aimed at bolstering the bank’s credibility after it underestimated how long and how severe this outbreak of inflation would be. After reaching a record 9.1% in August, inflation may rise into double digits in coming months, economists say.

The war in Ukraine has fueled inflation in Europe, with Russia sharply reducing supplies of cheap natural gas used to heat homes, generate electricity, and run factories. That has driven up gas prices by 10 times or more.

European officials decry the cutbacks as blackmail aimed at pressuring and dividing the European Union over its support for Ukraine. Russia has blamed technical problems and threatened this week to cut off energy supplies completely if the West institutes planned price caps on Moscow’s natural gas and oil.

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