Europe’s two largest central banks have hiked interest rates sharply on Thursday, opting for bigger increases than the US Federal Reserve as inflation in the region remains near historically high levels.
The European Central Bank (ECB) and the Bank of England raised their rates an additional half point. Benchmark interest rates for both are at their highest levels since 2008.
Across the Atlantic, the Federal Reserve eased its rate hikes on Wednesday, offering just a quarter point increase as she felt she was making progress in her battle against inflation.
The ECB said it plans to raise interest rates further and “intends” to raise them another half a percentage point in March. Although inflation in the 20 countries that use the euro slowed in January, to 8.5%, it remains well above that of the bank 2% target.
Speaking to reporters after the announcement, ECB President Christine Lagarde noted recent sharp falls in energy prices but said the fight to tame inflation needed to go deeper.
“Headline inflation has come down and more than we expected and many expected,” she said. “But the underlying inflationary pressure is there, alive and kicking, which is why … I say we have more ground to cover and we’re not done.”
Inflation in the UK has also eased, reaching 10.5% in December, but remains close to a 41-year high.
The Bank of England has a particularly difficult task ahead: prices are rising rapidly as the UK faces recession risk, and rate hikes are acting to dampen both inflation and economic growth.. On Tuesday, the International Monetary Fund forecast that the UK would be the only major economy to contract this year.
The Bank of England said the UK inflation was likely to fall sharply for the rest of the year, largely because past increases in energy prices and other prices were no longer factored in. But he flagged significant uncertainty about his predictions.
“The labor market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation,” the bank said in a statement..
Moreover, wholesale energy prices could boost UK inflation more than expected, he added.
Regarding the UK economy as a whole, the Bank of England has become more optimistic, forecasting a 0.5% drop in output this year compared to the 1.5% contraction forecast in November. This is broadly in line with the latest IMF forecasts.
The ECB also released some details on the outcome of its asset purchase program, reiterating that its holdings would decline by 15 billion euros ($16.5 billion) per month on average from March to the end of June.