ECB raises interest rates to record 4pc as inflation persists

Christine Lagarde has increased interest rates to a record high as the European Central Bank (ECB) battles to bring down persistent inflation in the bloc.

The ECB President raised the headline deposit rate for the tenth consecutive time on Thursday from 3.75pc to an unprecedented 4pc.

Deutsche Bank said the ECB’s hiking spree was the most aggressive in observable history even when examining records held by the Bundesbank going back to 1949.

It is the latest step in the battle to defeat inflation, which Ms Lagarde said is staying “too high for too long”. Inflation has halved from its peak last year to 5.3pc in August, but is still more than double the ECB’s 2pc target.

Officials now expect inflation of 5.6pc in 2023 and 3.2pc in 2024, both worse than previously predicted, before falling towards the target at 2.1pc in 2025.

Ms Lagarde said: “Inflation has declined and we want it to continue to decline and to reinforce that process.

“We are doing that not because we want to force a recession but because we want price stability to be there for people who are taking the brunt of inflation, high prices, and predominantly those who are not the most privileged people.”

Even as inflation is proving hard to contain, GDP growth is weakening amid a slump in manufacturing and the services sector. The eurozone economy is forecast to grow by 0.7pc this year, 1pc next year and 1.5pc in 2025, significantly below previous estimates.

Ms Lagarde said: “Based on our current assessment, we consider that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to our target.

“Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.

“The focus is probably going to move a bit more to the duration [of restrictive rates] but it is not to say – because we cannot say that now – that we are at peak.”

Economists expect a serious slump or even recession as higher borrowing costs hit an economy already reeling from supply shortages and the energy shock triggered by Russia’s war in Ukraine.

Andrew Kenningham at Capital Economics said: “Given the strength of underlying inflation, we expect rates to remain at this level for at least a year even though the economy seems to be heading for a recession.”

Carsten Brzeski, economist at ING, added: “The ECB only has one job and this job is to maintain price stability. The eurozone has not seen price stability in almost three years. 

“And even if the inflation surge is mainly due to factors outside of the ECB’s direct reach, the Bank simply has to show its determination to stamp it out.

“That this approach will eventually push the eurozone economy into a more severe slowdown does not matter to the ECB, at least not for now.”