ECB Raises Interest Rates by a Historic 0.75 Point as Europe Stares at Recession

The increase mirrors recent moves by other major central banks, including the Federal Reserve, which is expected to unveil a third successive 0.75-point rate rise later this month. Canada’s central bank raised its policy rate on Wednesday by 0.75 percentage point to 3.25%, a 14-year high.

Rising borrowing costs will likely increase the risk of a slide into recession for Europe’s currency union, which is wrestling with surging energy costs and sagging confidence among households and businesses, driven by the war in neighboring Ukraine. With governments piling on debt to shield consumers and businesses from the impact of rising prices, a national election in Italy later this month could exacerbate strains in the region’s bond markets.

Still, the ECB’s move should help to support the euro currency, which recently sank to a 20-year low against the dollar, a loss of value that is making imports more expensive and aggravating inflation.

Inflation in the 19-nation eurozone has surpassed U.S. levels in recent weeks as Russia’s actions have curtailed Europe’s energy supplies and driven up prices. Eurozone inflation increased to 9.1% in August and is expected to rise toward 10% over the coming months, as some government energy and public-transport subsidies expire, especially in Germany.

Despite that, the ECB’s policy rate is significantly below those of other major central banks, including the Fed, which is expected to increase its benchmark rate later this month to a range between 3% and 3.25%.

The ECB has moved more cautiously because the eurozone’s economic recovery during the Covid-19 pandemic has been relatively slow, and officials initially expected inflation to decline this year. They also worried about how higher borrowing costs would affect weaker economies in Southern Europe.

Economists see few signs that the eurozone economy is overheating, unlike the larger U.S. economy. Instead, eurozone inflation is being driven primarily by soaring energy prices and persistent supply bottlenecks, which the ECB can do little to solve. The region’s gas bill this year and next is expected to be around 4% of gross domestic product above its historical average, according to Natixis, a French bank. Since energy is largely imported, that makes the region poorer and deals an enormous blow to the purchasing power of households and businesses.

Underlying inflation—which excludes volatile items such as energy and food—increased to 4.3% in August from 4% in July, some way above the ECB’s 2% inflation target. That suggests inflation is broadening and could remain too high even if energy and food prices stabilize.

ECB officials have signaled in recent days that they are willing to act forcefully to prevent high inflation rates from becoming entrenched, which could make their job harder and more costly.

The ECB raised one of its three key interest rates by three-quarters of a percentage point in January 1999 to help ease the transition to the new currency.

Write to Tom Fairless at [email protected]

The increase mirrors recent moves by other major central banks, including the Federal Reserve, which is expected to unveil a third successive 0.75-point rate rise later this month. Canada’s central bank raised its policy rate on Wednesday by 0.75 percentage point to 3.25%, a 14-year high.

Rising borrowing costs will likely increase the risk of a slide into recession for Europe’s currency union, which is wrestling with surging energy costs and sagging confidence among households and businesses, driven by the war in neighboring Ukraine. With governments piling on debt to shield consumers and businesses from the impact of rising prices, a national election in Italy later this month could exacerbate strains in the region’s bond markets.

Still, the ECB’s move should help to support the euro currency, which recently sank to a 20-year low against the dollar, a loss of value that is making imports more expensive and aggravating inflation.

Inflation in the 19-nation eurozone has surpassed U.S. levels in recent weeks as Russia’s actions have curtailed Europe’s energy supplies and driven up prices. Eurozone inflation increased to 9.1% in August and is expected to rise toward 10% over the coming months, as some government energy and public-transport subsidies expire, especially in Germany.

Despite that, the ECB’s policy rate is significantly below those of other major central banks, including the Fed, which is expected to increase its benchmark rate later this month to a range between 3% and 3.25%.

The ECB has moved more cautiously because the eurozone’s economic recovery during the Covid-19 pandemic has been relatively slow, and officials initially expected inflation to decline this year. They also worried about how higher borrowing costs would affect weaker economies in Southern Europe.

Economists see few signs that the eurozone economy is overheating, unlike the larger U.S. economy. Instead, eurozone inflation is being driven primarily by soaring energy prices and persistent supply bottlenecks, which the ECB can do little to solve. The region’s gas bill this year and next is expected to be around 4% of gross domestic product above its historical average, according to Natixis, a French bank. Since energy is largely imported, that makes the region poorer and deals an enormous blow to the purchasing power of households and businesses.

Underlying inflation—which excludes volatile items such as energy and food—increased to 4.3% in August from 4% in July, some way above the ECB’s 2% inflation target. That suggests inflation is broadening and could remain too high even if energy and food prices stabilize.

ECB officials have signaled in recent days that they are willing to act forcefully to prevent high inflation rates from becoming entrenched, which could make their job harder and more costly.

The ECB raised one of its three key interest rates by three-quarters of a percentage point in January 1999 to help ease the transition to the new currency.

Write to Tom Fairless at [email protected]