European Central Bank (ECB) Hikes Interest Rates by 0.75%
The ECB has implemented a significant 75 basis point increase in three key interest rates to combat soaring inflation and stabilize the Eurozone economy.
Eurozone inflation surges to 9.1% in August 2022; economy faces stagnation through Q1 2023
On September 8, 2022, the Governing Council of the European Central Bank (ECB) approved a decisive 75 basis point increase across three main interest rates, effective September 14. This strategic move aims to curb the soaring inflation and steer it back towards the ECB's medium-term target of 2%. The Council has signaled intentions to continue raising rates in upcoming meetings to temper demand and prevent entrenched inflation expectations.
Eurostat's flash estimate reveals that inflation in the Eurozone hit 9.1% annually in August. In response, ECB experts have revised inflation forecasts upwards, now anticipating average inflation rates of 8.1% in 2022, 5.5% in 2023, and 2.3% by 2024.
Key Insights
- The ECB raises three crucial interest rates by 75 basis points starting September 14, 2022.
- The primary objective is to reduce inflation to 2%.
- August's inflation rate in the Eurozone stands at a high 9.1%.
- Inflation projections updated to 8.1% for 2022, 5.5% for 2023, and 2.3% for 2024.
- The Eurozone economy is forecasted to stagnate from late 2022 through Q1 2023.
Factors Driving Inflation in the Eurozone
The ECB identifies key inflation drivers including skyrocketing energy and food prices, demand surges in certain sectors fueled by economic reopening, and persistent supply chain disruptions. Additionally, inflationary pressures are broadening across the economy, suggesting a potential near-term rise in inflation.
Economic Slowdown and Stagnation Outlook
Following a recovery in early 2022, the Eurozone economy is now undergoing a marked slowdown, with stagnation expected through the first quarter of 2023. High energy costs are eroding consumer purchasing power, supply bottlenecks, though easing, continue to limit growth, and geopolitical tensions—particularly Russia’s unwarranted aggression toward Ukraine—are dampening business and consumer confidence.
Details of Interest Rate Increases
The ECB is increasing the rates on the main refinancing operations, the marginal lending facility, and the deposit facility by 75 basis points each. The updated rates will be 1.25%, 1.50%, and 0.75% respectively, effective September 14.
Impact on Asset Purchase Programs
The Governing Council plans to continue reinvesting all principal payments from maturing securities under its Asset Purchase Programme (APP) for an extended period. Regarding the Emergency Purchase Programme (EPP), reinvestments will continue at least until the end of 2024.
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