ECB Hikes Rates and Inflation Outlook, Lowers Growth Projections

Bridgette Randall
08 Sep, 2022
Frankfurt

The European Central Bank lifted its key lending rate 75 basis points following the 50 basis points increase in July. 

The widely expected rate hike lifted the main refinancing rate to 1.25%. marginal lending facility to 1.5% and the deposit facility to 0.75%. 

The central bank will also continue its asset purchase program, using the proceeds from maturing securities, and buy government bonds "as long as necessary." 

Policymakers also guided rates to rise over the next policy meetings as long as high inflation persists. 

Despite the hawkish comments from central bankers, many investors are skeptical that the policymakers will follow through and succeed in taming high inflation. 

The revised rates will be implements from September 14, 

At a press conference held after the rate-decision, ECB president Lagarde said that rates are still not high enough to tame inflation near the target rate of 2%. 

The ECB lowered its growth projection and revised higher inflation estimates but cautioned that the economy is holding up because a record number of people have jobs and people are traveling again and spending money on services. 

But businesses are suffering from persistent supply chain problems and record high energy prices and the economic outlook "for the coming months is worsening."

Moreover, the government programs to support the economic reopening after the pandemic have ended and the weakening global demand is also weighing on the economy. 

As a result, businesses and consumer confidence is weak amid uncertain outlook.  

Taking this into account the ECB revised higher inflation estimates to average 8.1% in 2022, 5.5% in 2023, and 2.3% in 2024 while growth projection was revised lower to 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024. 

The DAX index dropped 1.1% to 12,789.54, the CAC-40 index declined 0.4% to 6,084, and the FTSE 100 index was nearly unchanged at 7,242.61.