European Central Bank raises interest rate by 0.75%

9 Sep 2022 , 12:39 PM

Following the U.S. Federal Reserve and other central banks in a global frenzy of swift rate rises intended to snuff out record inflation that is pinching consumers and driving Europe toward recession, the European Central Bank raised interest rates to their highest level ever on Thursday.

The bank’s 25-member governing council increased its important criteria for the 19 nations that utilize the euro by unprecedented three-quarters of a percentage point. Since the introduction of the euro in 1999, the ECB has never lifted its benchmark rate for bank lending by three-quarters of a point. Rate changes are typically one-quarter of a point.

The jumbo hike aims to increase borrowing costs for individuals, corporations, and governments. In principle, this will reduce consumer spending and company investment while also bringing down rising consumer prices by lowering the demand for commodities. Analysts assert that it also aims to restore the bank’s credibility after it overestimated the duration and severity of this inflationary wave. Inflation may hit double digits in the upcoming months after hitting a record 9.1% in August, according to experts.

Due to Russia’s dramatic reduction in natural gas supplies, which are required to heat homes, provide power, and run factories, the conflict in Ukraine has spurred inflation across Europe. Due to this, gas costs have increased by ten times or more. Officials in Europe accuse the reductions of being a kind of blackmail meant to divide and pressure the EU over its backing for Ukraine. The West’s proposed price limitations on Moscow’s natural gas and oil have been blamed on technical issues, and last week, Russia threatened to entirely shut off energy supplies if they were implemented.

The current standard for lending to banks set by the ECB is 1.25%. After a number of significant rate rises, including two of three-quarters of a point, the Fed’s primary benchmark is now between 2.25% and 2.5%. The important benchmark for the Bank of England is 1.75%, while on Wednesday, the Bank of Canada increased its benchmark by three-quarters of a point to 3.25%.

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