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ECB makes large interest rate hike, bank deposits at 1.5%

The European Central Bank piled on another outsized interest rate hike aimed at squelching out-of-control inflation, increasing rates Thursday at the fastest pace in the euro currency’s history and raising questions about how far the bank intends to go with the threat of recession looming over the economy.

The 25-member governing council raised its interest rate benchmarks by three-quarters of a percentage point (0.75%) at a meeting in Frankfurt, matching its record increase from last month and joining the US Federal Reserve in making a series of rapid hikes to tackle soaring consumer prices.

It is the third consecutive increase, 2% in total, with the basic interest rate to be 2%.

The interest rate for bank deposits is now 1.5% from 0.75% previously.

Increased to 3.5% is the payment installment for a loan of 100,000and repayment in 20 years. Installment is increased to 626 euros from 511 today.

“Inflation remains far too high and will stay above our target for an extended period,” ECB President Christine Lagarde told reporters after the meeting. Bank policymakers “expect to raise interest rates further to ensure the timely return of inflation” to the 2% target.

She pointed to continued rate hikes despite the bank expecting “further weakening in the remainder of this year and the beginning of next year.”

The ECB has now raised rates for the 19-country euro area 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.

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 cut off most of its gas supplies during the war in Ukraine.

Some analysts foresee a half-point increase at the last rate-setting meeting of the year in December and think the bank may pause after that.

The ECB predicts inflation falling to 2.3% by the end of 2024.

Higher rates can control inflation by making it more expensive to borrow, spend and invest, lowering demand for goods.

But the concerted effort to raise rates has also raised concerns about their impact on economic growth and on markets for stocks and bonds.

The ECB’s benchmark for short-term lending to banks now stands at 2%, a level last seen in March 2009.

sources: AP, Greek media

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