The Governing Council of the European Central Bank (ECB) today, Thursday, September 8, 2022 decided to raise the three key ECB interest rates by 75 basis points.
The Governing Council took this decision, and expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period. According to Eurostat’s flash estimate, inflation reached 9.1% in August, 2022.
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.
Based on its current assessment, over the next several meetings, the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.
The Governing Council indicated in a press release that it will regularly re-evaluate its policy path in light of incoming information and the evolving inflation outlook. The Governing Council’s future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.
“Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation. Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term.
“As the current drivers of inflation fade over time and the normalisation of monetary policy works its way through to the economy and price-setting, inflation will come down. Looking ahead, ECB staff have significantly revised up their inflation projections and inflation is now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024”.European Central Bank
Key ECB interest rates
The decision to raise the three key ECB interest rates by 75 basis points means that the interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility will be increased to 1.25%, 1.50% and 0.75% respectively, with effect from 14th September, 2022.
Following the raising of the deposit facility rate to above zero, the two-tier system for the remuneration of excess reserves is no longer necessary. The Governing Council therefore, decided to suspend the two-tier system by setting the multiplier to zero.
Substantial slowdown in euro area’s economic growth
After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023.
“Very high energy prices are reducing the purchasing power of people’s incomes and, although supply bottlenecks are easing, they are still constraining economic activity. In addition, the adverse geopolitical situation, especially Russia’s unjustified aggression towards Ukraine, is weighing on the confidence of businesses and consumers”.European Central Bank
This outlook is reflected in the latest staff projections for economic growth, which have been revised down markedly for the remainder of the current year and throughout 2023. Staff now expects the economy to grow by 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024, the ECB disclosed.
The lasting vulnerabilities caused by the pandemic still pose a risk to the smooth transmission of monetary policy.