In a surprise move, the ECB raised its key interest rate by 0.5 percentage points after economists had expected a smaller rise of 0.25 points. Joining the Federal Reserve and the Bank of England in the fight against inflation, the ECB said the increase was necessary after rising food and fuel costs showed no sign of easing in the coming months. ECB President Christine Lagarde said: “We expect inflation to remain undesirably high for some time due to continued pressures from energy and food prices and pipeline pressures in the price chain.” Speaking at a press conference after the decision, he said the depreciation of the euro against the dollar had increased the cost of imports, adding to inflationary pressures. Meanwhile, the economic outlook for the 19-member currency bloc weakened, giving policymakers a headache as they weighed the likely path of inflation next year. If the economy slips into recession, it will put downward pressure on prices towards the ECB’s 2% target without the need for a further rate hike. “Looking ahead, in the absence of further disruptions, energy costs should stabilize and supply bottlenecks should ease, which, together with continued policy normalization, should support a return of inflation to our target.” , he said. The ECB raised its three key interest rates to 0.50%, 0.75% and 0% respectively, ending an era of negative interest rates dating back to the 2012 Greek debt crisis. The wrong currency traders reversed the euro’s losses against the dollar and the pound earlier in the day. However, the dollar could strengthen again when US policymakers meet next week, with expectations that they will raise the Fed’s key interest rate by 0.75 basis points. The Bank of England is also expected to go ahead with another interest rate hike in August. ECB officials came under pressure from German, Dutch and Austrian officials to raise borrowing costs despite concerns that debt financing costs would escalate for southern European members of the euro currency bloc. The collapse of the Italian government earlier today raised Rome’s borrowing costs and put pressure on the ECB to step up its “anti-fragmentation” program, which is designed to protect countries facing debt financing pressure. Recession worries helped push the euro to a 20-year low against the dollar, which bolsters the ECB’s work to fight inflation by exacerbating already high energy prices. Oil is among many commodities priced in dollars. Subscribe to the Business Today daily email or follow Guardian Business on Twitter @BusinessDesk “The 0.5 percentage point increase in interest rates and the easing of forward guidance show that the ECB believes the window for a series of rate hikes is closing fast,” said Carsten Brzeski, chief eurozone economist at ING bank. He said the causes of inflation would not be affected by the rate hike, but the ECB was wise to make a bigger splash in the face of a possible recession. “The increase, as well as possible further increases, are aimed at reducing inflation expectations and restoring the ECB’s damaged reputation and credibility as an inflation fighter. Today’s decision shows that the ECB is more concerned about this reliability than that it is predictable.” The Bank of Japan earlier on Thursday kept interest rates extremely low and signaled its determination to stay on the edge of a wave of policy tightening.
