The European Central Bank raises interest rates to the highest level since 2011

The European Central Bank hits three rate hikes by 0.75 percentage points, and announces another rate hike. – This says something about the pressure the economy is facing now, says the economist.

Above zero: Christine Lagarde, President of the European Central Bank, raises interest rates further. It is the first time in ten years that the interest rate is higher than zero in countries using the euro. Kay Pfaffenbach/Reuters

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European Central Bank (ECB) Raises the interest rate from zero to 0.75 percentThus, the ten-year period ends with zero or less interest rates. At the same time, another interest rate hike is announced at future meetings depending on economic data, which is evaluated from one meeting to another.

Only once before has the bank raised interest rates so much in one go, and that was a technical adjustment after the launch of the euro in 1999.

The interest rate hike comes as a result of record high inflation in Euro-zoneCountries that use the euro It was expected by a majority of economists in a Bloomberg survey.

Interest rate increases must come at the right time and be of the size we are approaching inflation targetThe goal is 2% inflation over the medium term. The further away we go, the greater the increases, says Christine Lagarde, CEO of the European Central Bank at the press conference after the news.

– We believe it will take several rate meetings before we reach the target; Maybe more than two, but less than five, a relay.

At its last interest rate meeting in July, the European Central Bank surprised by Double the interest rate increase0.5 percentage point, twice as much as regular interest rate adjustments to zero percent. It was the first increase in 11 years.

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The interest rate on mortgages rises much more than the interest rate on deposits

– Slope in the front

The chief economist, Sarah Midtgaard at Handelsbanken, was not surprised by the sharp jump in interest rates.

This says something about the pressure the economy is facing now. Inflation should come down and the central bank should take it seriously. It’s very steep forward now.

You remember that inflationary pressure in the eurozone is very high, and that it hasn’t been at this level since the 1980s.

The European Central Bank is doing this to cool demand, which can affect prices, says Midtgaard and notes that it takes time to bring inflation down to the 2 percent target.

The move: Sarah Midtgaard, chief economist at Handelsbanken, points out that the sharp rise in interest rates illustrates the stress in the economy. Adrian Nielsen / E24

Adjusts inflation expectations upwards

Behind today’s decision lies a significant upward revision of inflation expectations. The social security standard now envisages an average of 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024. The target is 2 per cent.

Inflation risks are mainly to the upside, says ECB’s Lagarde, adding that risks associated with economic growth are on the downside.

Estimates of economic growth have already been revised to a large extent.

After a rebound in the first half of 2022, recent data point to a significant slowdown in economic growth in the eurozone, and an economy that is expected to stagnate later in the year and in the first quarter of 2023, according to the European Insurance Council.

– Extremely high energy prices reduce people’s purchasing power, and even if bottlenecks in supply chains are reduced, they can still limit economic activity, she says.

Lagarde also says that today’s interest rate of 0.75 percent is still lower than what is considered neutral interest rateAn interest rate that does not narrow and does not give an additional speed to the economybut this guy is on his way to that level.

The balance between stagnation and inflation

ESB “stands in a dilemma” between RecessionRecession in the economy at least two consecutive quarters with a decline in GDP Inflation is very high, said Kjersti Haugland, chief economist at DNB Markets, before today’s decision.

– She said that there are strong price pressures in the euro area at the same time that the energy crisis makes it likely that the currency union is heading into a recession and a hard winter.

The Eurozone is one of Norway’s most important trading partners, and therefore both the level of activity and interest rates also affect the Norwegian economy, the krone exchange rate and the interest rate level.

If interest rates are raised abroad more than they have been raised here at home, all this implies a weaker krone exchange rate.

Norway’s central bank raised the interest rate by half a percentage point in August to 1.75 percent, and announced a new rate increase on September 22.