“The ECB made today’s decision and expects to raise interest rates further as inflation remains too high and likely to exceed its target over the long term,” the ECB said in a statement.
Inflation in the Eurozone reached 9.1% in August, due to higher energy costs and higher food prices.
Decades of high inflation have already taken a toll. Business activity fell for the second month in a row in August, according to a recent survey, with Germany, Europe’s largest economy, suffering an especially sharp decline. Gross domestic product, the broadest measure of the region’s economy, is likely to contract in the third quarter. Economists warn that Europe’s recession is looming.
But central banks worry that the energy price shock has already raised expectations of higher inflation over the medium term. This could significantly complicate the ECB’s return to its 2% target rate.
“Price pressures continue to build and widen across the economy, and inflation could rise further in the short term,” the ECB said.
We expect inflation to average 8.1% this year and 5.5% in 2023, a significant increase from previous forecasts. Meanwhile, economic growth is below expectations, with him at 3.1% this year and just 0.9% next year.
“Although there seems to be universal agreement that higher interest rates are needed to prevent high inflation from being built in, [Russian] Putin has already created a lot of slack in the European economy,” said Kit Jax, a strategist at Societe Generale.