ECB raises interest rates by 0.75%, a record
The European Central Bank raised key rates by a record 75 basis points today and signaled further hikes, prioritizing the fight against inflation even as the eurozone economy heads for a probable winter recession.
The ECB raised its deposit rate from zero to 0.75% and raised the main refinancing rate to 1.25%, its highest level since 2011.
The increases come as inflation grows wider and was in danger of taking root.
Today’s increases come after the ECB raised rates by 50 basis points in July, its first increase in more than a decade.
Interest rate hikes will increase repayments for more than 400,000 tracker and variable mortgage holders here.
“During the next meetings, the Governing Council plans to raise interest rates further to dampen demand and guard against the risk of a persistent rise in inflation expectations,” the ECB said in a statement.
The move comes after weeks of solicitation by policymakers, with an apparent majority arguing for a 75 basis point hike and a few political doves trying to scale back expectations.
Markets, however, sided with the conservatives and priced an 80% chance of a 75 basis point move.
It came even as economists polled by Reuters were more evenly split, showing only a slight majority expecting a bigger move.
The sharp rise comes as the ECB raised its own inflation forecast and continues to see price growth well above its 2% target over its entire projection horizon.
“ECB staff have significantly revised their inflation projections upwards and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024,” added the ECB.
Conservatives feared that anything other than an oversized move signaled the ECB was not serious about its inflation-fighting mandate.
This risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB.
Half-hearted action would also have weakened the euro, boosting inflation through more expensive energy imports.
The anticipation of rate hikes also allows the ECB to do most of the work before the recession sets in.
Attention now turns to ECB President Christine Lagarde’s press conference later this afternoon.
The European Central Bank also today cut its growth outlook for 2023 as the loss of cheap Russian gas will weigh on confidence, consumption and investment in the bloc.
The ECB has repeatedly underestimated inflation over the past two years as real price growth exceeded even its most pessimistic scenarios, raising questions about the credibility of the forecasts.
The bank now forecasts eurozone inflation at 8.1% this year from a forecast of 6.8% in June, while the price growth estimate for 2023 has been raised to 5.5% from 3 .5%.
In 2024, the last year of its projection horizon, inflation is expected at 2.3%, above its target of 2%.
The ECB now expects GDP growth to be 3.1% this year from 2.8% forecast in June, but it has cut its expansion forecast for 2023 to 0.9% from 2.1%.
Speaking ahead of today’s ECB decision, Trevor Grant, chairman of the Association of Irish Mortgage Advisors, said 285,000 tracker mortgage holders would be directly affected by an interest rate hike by the ECB.
“There are approximately 285,000 mortgage tracker customers in Ireland. For every 0.5% increase per €100,000 you owe, you can effectively expect to see your mortgage payments increase by €25 per And if rates increase by 0.75% for every €100,000, you can expect to see your repayments increase by €37 per month,” he said on Morning Ireland.
“It’s very hard to know what the average is because of mortgage terms and balances, but you’re going to see repayments go up basically, most people by at least $75 a month if the announcement of 0, 75% is announced. And obviously, the more the more the increase will be important”, he added.
He said there was a surprise in July when the 0.5% hike was announced by the ECB when a 0.25% increase was expected.
Mr Grant said it is unclear whether those looking to secure a mortgage will be affected by this upcoming increase.
“There are no more tracker mortgages available. Variable rates were not increased by the banks the last time there was an increase. This is because they are simply too high to anyway. And all the fixed rates for new customers weren’t affected,” he said.
He said more than 80% of new mortgage holders take out fixed rate mortgages for many reasons, including for security purposes.
John Finn, managing director of Treasury Solutions, said ECB rates are likely to top 2% over the next 12 months.
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“We’ve had zero rates for so long. The new normal will be around 2% to 2.25%,” he told Morning Ireland.
He said he didn’t see much prospect of the ECB backtracking on rate hikes in the face of a deteriorating economic backdrop.
“We have had artificially low rates for so long and with inflation as high as it has been, even if it comes back to 3% or 4%, you still expect interest rates around 2 %, so I can’t see that happening,” he explained.
Mr Finn said he was surprised that major retail banks did not raise rates in response to the 0.5% interest rate hike announced by the ECB in July, but he said he expected them to move after today’s rate decision.
The only upside to rate hikes is that depositors can expect to withdraw money from their savings after many years of low or negative deposit rates.
“We are already seeing it. Big corporations were in charge of depositing their money. This has disappeared over the past few weeks. There is at least some light on the horizon for depositors,” he concluded.