Inflation in the euro area rose to 9.9 percent in September from 9.1 percent in August, well above the ECB’s annual price stability target of 2 percent. “Inflation remains far too high,” the ECB said in a press release on Thursday.
Europe’s central bankers fear that expectations of higher inflation will feed into consumer and business planning and become a self-fulfilling prophecy if they don’t act. As a result, the ECB has hiked interest rates to slow the economy even as the eurozone appears to be headed for recession and business activity has slowed faster than expected in recent weeks.
Even after Thursday’s move, a future rate hike is likely, the ECB said.
The ECB’s deposit rate was still negative in July, ahead of the bank’s first rate hike in 11 years. Last month, it raised interest rates by three-quarters of a percentage point in its largest rate hike to date.
Thursday’s rate hike, which is as high as last month and brings the main deposit rate to 1.5 percent, makes the past few months the “sharpest and most aggressive rate hike cycle on record,” according to Carsten Brzeski, chief economist at ING Deutschland Bank.
But the inflation the ECB is trying to combat is affecting countries across Europe to varying degrees. In tiny Estonia it’s around 24 percent, while in France prices are only increasing at around 6 percent a year.
France has spent heavily in recent months trying to limit energy price hikes and curb inflation, and President Emmanuel Macron has been among the most vocal critics of a rate hike. in the an interview Published last week, he said he was “concerned that many pundits and certain European monetary policy players are telling us that European demand should be broken in order to better contain inflation”.
“Unlike the United States, we are not in a European overheating situation,” Macron told business daily Les Echos.
In her press conference on Thursday, Lagarde declined to comment directly on Meloni’s criticism, but she defended the ECB’s hike, saying that “our mandate is price stability and we must deliver on it by any means at our disposal.”.”
Behind the scenes, however, the disagreements may have had an impact. “Despite the jumbo hike, communications became more cautious,” wrote Marco Valli, global head of research at UniCredit, in a note following Lagarde’s press conference. Valli cited the ECB’s analysis that it had already made “significant progress”, which may indicate future rate hikes could be lower than some had feared. “This appears to reflect growing concerns about the growth outlook, which has deteriorated more and faster than the ECB had anticipated,” Valli wrote.
Hovering over the rows between EU leaders and the ECB, at least in part, is the revolt in financial markets sparked by then-Prime Minister Liz Truss’ economic policy proposals last month. She had planned to use borrowed money to pay for tax cuts while spending heavily to protect consumers from soaring energy bills. In response, the British pound fell to an all-time low against the US dollar.
Europe’s STOXX 600 index fell as shares opened on Thursday in anticipation of the ECB’s rate hike. Losses were limited, however, which analysts attributed to markets already discounting a significant rate hike.
According to Citibank, the latest ECB action is part of the broadest interest rate hike campaign by central banks since the late 1990s. The easing of restrictions on doing business during the pandemic period – coupled with higher food and fuel prices as a result of the war in Ukraine – have pushed up prices in the United States, Canada, the United Kingdom, Europe and dozens of developing countries.
The ECB’s main deposit rate could peak at 3 percent early next year, up from 1.5 percent now, Jack Allen-Reynolds, senior Europe economist at Capital Economics in London, wrote in a note to clients on Wednesday. Other analysts expect the rate to be slightly lower, around 2.25 percent.
The ECB has lagged the Federal Reserve this year, which has raised interest rates by three percentage points since March and is expected to announce another jumbo hike at its Nov. 1-2 meeting.
Lynch reported from Washington.