FRANKFURT, Sept. 8 (Xinhua) -- The European Central Bank (ECB) on Thursday raised key interest rates by a record 75 basis points in a bid to rein in inflation in the euro area.
The move is a sign that the ECB is delivering on its promise to go big on fighting the spiraling inflation, according to analysts.
LARGEST RATE HIKE
After the rate hike, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 1.25 percent, 1.5 percent, and 0.75 percent, respectively, from Sept. 14, 2022, read the statement issued by the ECB after Thursday's rate-setting meeting.
After the adjustment, the deposit interest rate has been brought to positive territory for the first time in a decade. The 75-bp hike is also the largest increase made by the ECB in history.
The central bank also said that today's rate hike will be followed by further increases in the coming months to curb spiraling inflation, which is becoming broad and entrenched.
The ECB justified the rate hike with the level of inflation, which "remains far too high and is likely to stay above target for an extended period."
INFLATION STINGS
Inflation in the 19-member euro area has been hovering at alarmingly high levels for an extended period.
Annual inflation in the area was 9.1 percent in August, according to the statistical office of the European Union (EU).
ECB president Christine Lagarde said in a statement that very high energy prices are reducing the purchasing power of people's income and constraining economic activity.
By raising interest rates, the ECB aims to "dampen demand and guard against the risk of a persistent upward shift in inflation expectations."
Striking an optimistic tone, the central bank believed that inflation would come down once the driving factors fade, and its policies start to work.
However, data suggest that the situation could go worse before it becomes better.
The ECB said it expects inflation to be 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024 in the euro area.
GLOOMIER GROWTH PROSPECT
The 75-bp rate hike and the central bank's commitment to further hikes came as a surprise to some market observers who fear that rate hikes can hardly avoid hurting the economy.
The ECB expects the euro area economy to grow by 3.1 percent in 2022, 0.9 percent in 2023 and 1.9 percent in 2024.
However, Lagarde warned that the economy is likely to slow down substantially over the remainder of this year as uncertainty remains high and confidence is falling sharply.
Meanwhile, the labor market has been robust in the euro area, with the unemployment rate hitting a historical low of 6.6 percent in July.
Carsten Brzeski, Global Head of Macro at ING Think, an economic research arm of the ING bank, noted that the ECB's rate hike on Thursday is an indication that it has turned hawkish in normalizing monetary policies. He questioned whether the ECB would stick to its aggressive rate hiking policy if recession becomes a reality.
He also doubted the effects of rate hikes on inflation in the euro area.
"We still can't see how monetary policy can bring down inflation that is mainly driven by (external) supply-side factors," he said.
