ECB raises rates by 75bps

The European Central Bank has raised its three key interest rates by 75 basis points, raising its main refinancing rate to 1.25 percent.

The move, which was expected and already priced in by bond markets, came despite concerns about a possible recession in the eurozone.

“This important step anticipates the transition from the predominantly accommodative level of policy rates to levels that will ensure the timely return of inflation to the ECB’s 2 percent medium-term target,” the ECB said in a statement.

He added that his Governing Council is expected to raise interest rates further at upcoming meetings to curb demand and hedge against the risk of persistently high inflation.

According to Eurostat’s preliminary estimate, inflation reached 9.1 percent in August, driven by rising energy and food prices and supply bottlenecks.

Looking ahead, the central bank has significantly revised upwards its inflation projections, which are now expected to average 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024.

The Bloomberg Pan-European Aggregate Index, which tracks fixed-rate investment-grade securities issued in European currencies, was flat after falling 15.60 percent over the year.

the the euro remained close to parity with the dollar after some slight fluctuations after the announcement.

Analysts at JPMorgan, Goldman Sachs and Bank of America had previously said they expected the ECB to raise rates by 0.75 percentage point at its next meeting.

Following today’s announcement, the main refinancing rate is 1.25%, the marginal lending facility rate is 1.5% and the deposit facility rate is 0.75% as of 14 September.

The rate hikes come despite concerns about an impending recession.

The ECB said today that recent data points to a “substantial slowdown in economic growth in the euro zone”, with the economy expected to stall later in the year and in the first quarter of 2023.

Consequently, its economic growth projections have been revised down to 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024.

The bank said it will continue to fully reinvest principal payments on maturing securities purchased under the asset purchase program for “as long as necessary” to maintain liquidity.

It will also reinvest payments on maturing securities purchased under the covid emergency program through at least the end of 2024.

Rob Clarry, investment strategist at Evelyn Partners, said: “The decision to raise interest rates is hardly surprising in what has been a dramatic couple of weeks for the euro zone.

“In the run-up to the meeting, natural gas prices in Europe have been incredibly volatile, fueled by Russia’s decision to shut down the Nordstream 1 pipeline last Friday. European lawmakers expected this, but it spooked markets given Europe’s dependence on Russia. gas.”

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