The European Central Bank lifted all three of its benchmark rates by 75 basis points this morning, matching market expectations as it battles against rising inflation pressures. The statement announcing the decision said, “Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations,” and “future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach”.

Policymakers said “inflation remains far too high and is likely to stay above target for an extended period,” with price pressures continuing to “strengthen and broaden across the economy”. Updated projections showed policymakers expect inflation to average 8.1 percent in 2022, 5.5 percent in 2023 and 2.3 percent in 2024 – up dramatically from June’s 6.8, 3.5, and 2.1-percent estimates.

The economy is now expected to stagnate by year end, with output expanding 3.1 percent on a full-year basis in 2022, 0.9 percent in 2023 and 1.9 percent in 2024. This implies a prolonged slowdown, with the 2023 forecast contrasting very unfavourably with the 2.1 percent estimate provided in June. The euro area expanded by 0.7 percent quarter-over-quarter in the first three months of this year, and second-quarter growth was revised up to 0.8 percent from 0.6 percent.

In the minutes after the decision, the euro moved sideways and shifts in intra-bloc spreads were negligible as investors remained focused on looming recessionary threats.

Few expect the central bank’s efforts to prove successful in bringing headline inflation down – the economic bloc is facing an energy shock that won’t be addressed by higher rates. Instead, in alignment with their counterparts elsewhere, Europe’s central bankers appear focused on keeping consumer spending – and embedded wage demands – under control.

Karl Schamotta, Chief Market Strategist