- All rates raised 75 basis points

- Bank says further increases coming

- EUR/USD whipsaws around parity

- Staff sees lower growth, more inflation

By Eric Culp

European Editor, LiveSquawk News

@EricCulpLS

8 September 2022 | 17:30 GMT

The European Central Bank announced major rate hikes on Thursday and said there would be further increases in the months to come.

The bank raised all three of its interest rates by 75 basis points, which was in-line with market expectations. This brings the benchmark refinancing rate to 1.50% and the deposit rate to 0.75%.

The hike was the bank’s biggest in more than two decades and matched an increase from the adjustment period during the euro’s introduction in 1991.

Promising higher interest rates in the months ahead, ECB President Christine Lagarde made it a point to say such a 75bp hike is “not the norm”.

She noted that “in current conditions”, the bank would need two to four more rate increases to get to the level required to bring Eurozone inflation back to the lender’s target of 2% over the medium term.

Mapping out rate moves – or a lack of them – has blown up in the bank’s face before, most recently after Lagarde said in December that there would likely be no increases in 2022.

On Thursday she repeatedly said that the bank is now “data-dependent” and decisions will be made on a meeting-to-meeting basis.

Noting the disconnect in Lagarde’s statements, Frederik Ducrozet from Pictet Wealth Management used Twitter to quip: “So forward guidance is not dead after all?”

The single currency was brutalised in trading during Lagarde’s press conference, plunging more than half a cent against the dollar to the lowest point in the day and was just above 0.995 at press time.

Clemens Fuest, president of Germany’s Ifo economic thinktank, welcomed the hikes. “Better late than never,” he said.

He noted that ECB monetary policy remains expansionary and that more tightening is required.

The ECB has flipflopped in the past, but Capital Economics said more increases are coming. “We doubt that even a recession would cause the bank to halt rate hikes.”

Eurozone consumer price growth is not over the hump yet. (Source: ECB)

Scorching price growth meets economic slowdown

Inflation in the euro area rose to a record 9.1% last month, according to preliminary information from the EU, and the ECB raised its inflation outlook as part of its quarterly forecast report. It said inflation this year is expected to average a whopping 8.1% versus the June estimate of 6.8%. Next year’s projection was raised two full percentage points to 5.5%, with the following year coming more in line with the bank’s target at 2.3% compared to the last forecast of 2.1%.

Lagarde called the current level of consumer price growth “far too high” and warned, “Over the medium term, inflation may be higher than expected.”

So, as the bank increases borrowing cost, it is staring down flagging growth in the single-currency area. While ECB staff raised their GDP growth expectations for this year to 3.1% from the June prediction of 2.8%, they slashed next year’s growth rate to 0.9% from 2.1% and lowered the 2024 rate to 1.9% from 2.1%

Lagarde cited four factors dragging on growth: a slowdown in the strong rebound in demand for services, weakening global demand, and high uncertainty and sharply falling confidence, and, of course, the economic factor currently hitting just about everyone in the world, high inflation.

She warned that in the standard outlook scenario, growth would “stagnate” in the final quarter of this year and the first three months of 2023.

Calling the downside scenario “really dark”, Lagarde said it could include economic contraction and natural gas rationing.

Gas shipments from Russia via the Nord Stream 1 pipeline remain stopped as Moscow attempts to force Europe to lift sanctions enacted due to the war in Ukraine.