Europe sees fastest pace of rate hikes since euro launched

Oct 27, 2022, 1:10 AM | Updated: 9:00 pm
Christine Lagarde, President of the European Central Bank (ECB), gives a press conference at ECB he...

Christine Lagarde, President of the European Central Bank (ECB), gives a press conference at ECB headquarters in Frankfurt, Germany, Thursday, Oct. 27, 2022. The European Central Bank has made another outsized interest rate hike aimed at squelching out-of-control inflation. It increased rates by three-quarters of a percentage point Thursday at a meeting in Frankfurt. (Arne Dedert/dpa via AP)

(Arne Dedert/dpa via AP)

FRANKFURT, Germany (AP) — The European Central Bank piled on another outsized interest rate hike aimed at squelching out-of-control inflation, increasing rates at the fastest pace in the euro currency’s history and underscoring the bank’s determination to control prices despite the threat of recession.

The 25-member governing council raised its interest rate benchmarks by three-quarters of a percentage point at a meeting Thursday in Frankfurt, matching its record increase from last month and joining the U.S. Federal Reserve in making a series of rapid hikes to tackle soaring consumer prices.

ECB President Christine Lagarde acknowledged the risk is growing that the 19-country eurozone may plunge into recession but says “inflation remains far too high” and will stay high for an extended period, so the bank expects to keep hiking.

“We are not done yet. There is more ground to cover,” she told reporters, despite bank expectations that the economy will weaken the rest of this year and beginning of next.

“In the present state of uncertainty, with the likelihood of recession looming much more on the horizon … everyone has to do their job,” Lagarde said. “Our job is price stability. This is our primary mandate, and we are riveted to that.”

Central banks around the world are rapidly raising interest rates that steer the cost of credit for businesses and consumers. Their goal is to halt galloping inflation fueled by high energy prices tied to Russia’s war in Ukraine, post-pandemic supply bottlenecks, and reviving demand for goods and services after COVID-19 restrictions eased. The Fed raised rates by three-quarters of a point for the third straight time last month.

Quarter-point increases have usually been the norm for central banks. But that was before inflation spiked to 9.9% in the eurozone, fueled by higher prices for natural gas and electricity after Russia slashed gas supplies during the war in Ukraine.

“A long-lasting war in Ukraine remains a significant risk,” Lagarde said. “Confidence could deteriorate further and supply side constraints could worsen again. Energy and food costs could also remain persistently higher than expected. A weakening world economy could be an additional drag on growth in the euro area.”

Inflation robs consumers of purchasing power, leading many economists to pencil in a recession for the end of this year and the beginning of next year in the 19 countries that use the euro as their currency. While inflation in the U.S. is near 40-year highs of 8.2%, fueled in part by more pandemic support spending than in Europe, the American economy grew in the third quarter after shrinking in the first half of 2022.

The ECB has now raised rates by a full 2 percentage points in just three months, distance that took 18 months to cover during its last extended hiking phase in 2005-2007 and 17 months in 1999-2000. The benchmark for short-term lending to banks now stands at 2%, a level last seen in March 2009.

The next meeting in December may see a smaller rate increase, analysts say.

“We expect the pace of hiking to slow, given that the window of opportunity to raise interest rates is narrowing with a recession in the euro area looming,” said Nicolas Sopel, senior macro strategist at Quintet Private Bank.

Higher rates can control inflation by making it more expensive to borrow, spend and invest, lowering demand for goods. But the effort to raise rates also has raised concerns about their impact on economic growth and on markets for stocks and bonds.

To sop up economic stimulus efforts that have outlived their purpose now that rates are rising, Lagarde encouraged banks to repay the cheap, long-term loans they received from the ECB to help them keep lending to businesses. The central bank raised the interest rates on the loans and said it would let banks voluntarily repay the money.

Another potentially fraught issue in drawing down stimulus without triggering turmoil in nervous markets is what to do with the bank’s 4.9 trillion euro ($4.9 trillion) pile of bonds bought under earlier efforts to lower market borrowing costs. That will be not be outlined until the December meeting, Lagarde said.

For now, the bank is maintaining the size of its holdings by using money from maturing bonds to buy new ones. Because the ECB is such a large bondholder, shrinking the bond pile could roil bond markets and make government borrowing costs more expensive.

The risks of bond market trouble were illustrated last month when then-U.K. Prime Minister Liz Truss announced tax cuts and spending increases that raised questions about state finances, triggering a sudden selloff in British government bonds and forcing her resign after 45 days in office.

Bond market turbulence also threatened to break up the eurozone during its 2010-2015 debt crisis. Now, borrowing costs for indebted eurozone governments such as Italy have risen along with ECB interest rates.

The euro flirted below parity with the dollar after the ECB decision and remains near its lowest levels in 20 years. A weaker euro worsens inflation by raising the price of imported goods.

Reasons for the drop in the exchange rate include higher U.S. interest rates that attract money into investments priced in dollars and, more broadly, the dwindling prospects for Europe’s economy.

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


President Joe Biden and French President Emmanuel Macron toast during a State Dinner on the South L...
Associated Press

French President visits New Orleans, Louisiana

BATON ROUGE, La. (AP) — French President Emmanuel Macron will head to Louisiana on Friday to celebrate longstanding cultural ties and to discuss energy policy. Macron’s office said he will meet with political leaders and is scheduled to see the historic French Quarter, the heart of the city. The Advocate reported that the visit will […]
10 hours ago
FILE - Carolina Panthers owner David Tepper watches during warm ups before an NFL football game bet...
Associated Press

Panthers owner David Tepper scrutinized in criminal probe

COLUMBIA, S.C. (AP) — Carolina Panthers owner David Tepper and his real estate company are the focus of a criminal investigation to see if they misused any public money in their failed effort to build a practice facility for the NFL team. The York County Sheriff’s Office said state agents and local prosecutors are aiding […]
10 hours ago
Associated Press

Writers: Russian attacks seek ‘erasure’ of Ukrainian culture

KYIV, Ukraine (AP) — Russian troops in Ukraine are deliberately attacking the country’s museums, libraries and other cultural institutions, according to a report issued Friday by the U.S. and Ukrainian chapters of the international writers’ organization PEN. “Culture is not collateral damage in the war against Ukraine; it’s a target, a central pillar of Russian […]
10 hours ago
FILE - Two feral hogs are caught in a trap on a farm in rural Washington County, Mo., Jan. 27, 2019...
Associated Press

Feral hog control: 8 years, some progress, $2.5B damage/year

NEW ORLEANS (AP) — Eight years into a U.S. program to control damage from feral pigs, the invasive animals with big appetites and snouts that uproot anything that smells good are still a multibillion-dollar plague on farmers, wildlife and the environment. These prolific hogs gone wild have been wiped out in 11 of the 41 […]
10 hours ago
A 3D-printed model of a MQ-9 Reaper drone is seen at at Al-Udeid Air Base, Qatar, Friday, Dec. 2, 2...
Associated Press

US forces monitor Mideast skies at Qatar base amid World Cup

AL-UDEID AIR BASE, Qatar (AP) — As World Cup fans throng stadiums across Qatar, about 8,000 American troops stationed just nearby watch over the airspace of the tumultuous Middle East from a major base run by this energy-rich nation. Built on a flat stretch of desert about 20 miles (30 kilometers) southwest of Qatari capital […]
10 hours ago
Associated Press

Talks with breakaway region fail to ease Moldova energy woes

CHISINAU, Moldova (AP) — An electricity plant in a Moscow-backed breakaway region of Moldova will not resume supplying energy to the rest of the country after a meeting between Moldovan officials and representatives of the Transnistria region failed to produce an agreement Friday, authorities said. The meetings held in Moldova’s capital, Chisinau, focused on a […]
10 hours ago

Sponsored Articles

Day & Night Air Conditioning, Heating and Plumbing

Prep the plumbing in your home just in time for the holidays

With the holidays approaching, it's important to know when your home is in need of heating and plumbing updates before more guests start to come around.
(Desert Institute for Spine Care photo)...

Why DISC is world renowned for back and neck pain treatments

Fifty percent of Americans and 90% of people at least 50 years old have some level of degenerative disc disease.
Quantum Fiber

How high-speed fiber internet can improve everyday life

Quantum Fiber supplies unlimited data with speeds up to 940 mbps, enough to share 4K videos with coworkers 20 times faster than a cable.
Europe sees fastest pace of rate hikes since euro launched