The European Central Bank predicts another increase in key rates

The European Central Bank is seeing a growing risk that they will have to raise their key interest rate to 2% or more to curb record high inflation in the euro area, despite a likely recession.

It is reported by Reuters.

With inflation hitting 9.1% in August and exceeding the ECB’s 2% target for the next two years, the central bank is raising interest rates at a record pace and urging governments to help lower electricity bills that have surged since Russia’s invasion of Ukraine.

The ECB has already raised its deposit rate from zero to 0.75% on Thursday, and President Christine Lagarde has sent two to three more hikes, saying rates are still far from the level that will bring inflation back to 2%.

Reuters sources note that the ECB sees an increasing likelihood of moving the rate to a level that entails a slowdown in the economy, at 2% or higher.

The ECB now projects inflation at 2.3% in 2024, although one source said the domestic forecast presented at Thursday’s meeting is closer to 2% after accounting for recent gas prices.

Policymakers are reportedly bracing for a recession this winter and lower economic growth next year than the official ECB forecast of 0.9%. But some are positive about the strong labor market, which should cushion the impact of higher rates.

At Thursday’s meeting, politicians also began discussing the tens of billions of euros the ECB is required to pay banks out of their excess reserves now that the deposit rate is positive again, the sources said.

Recall:

The European Central Bank may raise its key rate sharply as the region’s economy slides into recession.

The consumer price growth index in the eurozone in August 2022 compared to August 2021 may reach a record 9.1%.

In July, the European Central Bank raised three key interest rates by 50 basis points for the first time in 11 years.

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