ECB raises BOE rates by half a percentage point

The central banks of Britain, the eurozone and Switzerland all raised interest rates by 0.5 percentage points after the Federal Reserve slowed growth as inflationary margins eased in advanced economies.

The European Central Bank said in a statement it would raise its key rate to 2 percent from 1.5 percent, the highest rate since 2009. It is “expected to be raised” [rates] In addition, inflation remains very high and is forecast to remain above target for a long time.” The bank also said it would reduce its multi-trillion-dollar bond holdings by 15 billion euros, or $16 trillion a month, starting in March. average at the start.

ECB policymakers are grappling with stubbornly high inflation that could last longer in Europe than in the U.S. European policymakers are spending heavily to support struggling consumers and businesses, while neighboring Russia are struggling with prolonged high energy prices due to the country’s war. Ukraine and acceleration of wage growth. All this can keep inflation high.

Investors will now turn to ECB President Christine Lagarde’s press conference starting at 08:45 ET for clues on how high eurozone rates will rise and how much the ECB may trim its bond portfolio. Removing this debt is likely to put pressure on highly indebted governments in Southern Europe by raising borrowing costs. The Fed has been cutting bonds since June.

Investors expect Europe’s major central banks to raise rates more than the Fed over the next 12 months as inflation in Europe is tighter. Although inflation has started to decline in both regions, it has fallen by 1.5 percentage points in the US since June, reaching 7.7% in October. Eurozone inflation fell to 10 percent in November from a record high of 10.6 percent in October. UK inflation fell to 10.7% in November from a four-decade high of 11.1% in October.

The BOE said it believed the UK economy was already in a “prolonged” recession, and for two of its nine rate-setters, the first of the two risks loomed larger. Two dissenters voted to leave the key rate unchanged, arguing that previous moves were “more than enough” to bring inflation back to the central bank’s 2 percent target. A rise to 3.5% would take the key rate to its highest level since October 2008, when the central bank rushed to ease policy to support economic growth at the start of the global financial crisis.

It was the first meeting since March in which a policymaker voted against a key rate hike, signaling that interest rates may be close to a peak.

However, most policymakers agreed that further rate hikes are “likely to be required” and that they “must” act if all the high inflation lasts longer than they expect. Six members rated the half-point increase as “strong,” according to meeting minutes. One member voted for another 0.75 percentage point hike, seeing signs that inflation would remain high for a long time.

“This diversity in views reflects the difficulty of managing the various shocks faced by an economy with rising inflation but a possible recession,” said Luca Bartholomew, economist at Money Manager abrdn.

Investors are closely watching where interest rates peak and how long they are likely to stay there, a decision that can change in financial markets.

Now that interest rates are approaching levels where they could affect economic growth, central banks must determine how much they need to cool the economy, and when energy and food prices fall, inflation will disappear on its own. This calculation is complicated by the fact that changes in interest rates can take years to fully affect the economy.

According to the BOE minutes, the two dissenters are in favor of leaving the key rate unchanged because “lags in the effects of monetary policy mean that significant effects of past rate hikes will still occur.”

Elsewhere in Europe, economic growth has slowed in recent months as rising inflation has weighed on spending by households and businesses. Some parts of the region are expected to experience a winter recession. Still, the latest data suggests that any slowdown is likely to be relatively shallow, in part because unemployment remains at or near record levels.

In Switzerland, the central bank warned in a statement that inflation is likely to remain high for now and said it may raise rates again. It also said it would intervene in the currency market if necessary to control the strength of the Swiss franc.

Analysts say the SNB may raise rates again next year amid higher-than-expected inflation. “We expect a final increase of 50 barrels in March,” said Frédéric Ducrozet, head of macroeconomic research at Pictet Wealth Management in Geneva.

The Swiss central bank is in a stronger position than many of its peers, as the country’s inflation rate was 3% in November, down from 3.5% in August. That’s still higher than the central bank’s target of 0% to 2%, but well below the 10% inflation rate in the surrounding eurozone. Low inflation in Switzerland reflects the strength of the Swiss franc, which has reduced import prices, as well as a moderate energy burden, economists said.

The SNB increased interest rates by 0.75 percentage points in September and by 0.5 percentage points in June. It marked a dramatic turnaround for the central bank, which has battled very low or negative inflation with years of aggressive policies, including negative interest rates and foreign exchange interventions to weaken the franc.

The Federal Reserve on Wednesday announced interest rates at 0.5% after four consecutive 0.75-point increases from 4.25% to 4.5%, signaling plans to raise rates in the spring. gave

In Asia, the Philippine central bank similarly eased its rate of tightening, raising its key rate from 5% to 5.5% on Thursday, before raising borrowing costs by 0.75 basis points in November.