The European Central Bank announced Thursday its largest-ever interest rate increase as officials confront a nightmare scenario of soaring inflation coupled with an economy that appears to be stalling.
Meeting in Frankfurt, Germany, the bank's governing council raised its main deposit rate by three-quarters of a percentage point, joining the U.S. Federal Reserve and other major central banks in a full-throated assault on rising prices, economists said.
European Central Bank President Christine Lagarde said the super-sized rate increase was needed after inflation reached 9.1% last month, "far away" from the bank's 2% goal. Europe faces a multiyear fight to control rising prices, Lagarde said, even as the central bank's forecast calls for output in the eurozone to "stagnate" for the next six months.
"Nobody should expect inflation is going to return to 2% in the next three months," she said. "We have a goal. We have a mission. We have incredibly high inflation numbers. The [European Central Bank] is serious about returning inflation back to 2%."
The rate increase Thursday marks the second consecutive assault on inflation in Europe that's seen eurozone borrowing costs rapidly exit subzero policy conditions and rise further in less than two months. The abrupt reversal follows accusations that the European Central Bank reacted too slowly to inflation that began as covid-19 lockdowns ended, and then worsened when Russia invaded Ukraine.
The euro slid against the dollar while Lagarde spoke concurrently Thursday with Fed Chair Jerome Powell, who declared that the U.S. central bank will act "forthrightly" and won't flinch in its efforts to curb inflation "until the job is done."
Rate increases often support a currency's exchange rate, but the euro has been under pressure because of more general fears about recession and economic growth. It has recently fallen under $1, the lowest level in 20 years.
The European Central Bank on Thursday also raised its outlook for consumer prices this year and next, while slashing its forecast for economic expansion in 2023. The 0.9% projection for growth next year is still more optimistic than the 0.7% median of predictions collected by Bloomberg, which forecast an advance of only 0.4%.
The bank's record increase is aimed at raising the cost of borrowing for consumers, governments and businesses, which in theory slows spending and investment, and cools off soaring consumer prices by reducing the demand for goods.
Analysts say it's also aimed at bolstering the bank's credibility after it underestimated how long and how severe this outbreak of inflation would be. After reaching a record 9.1% in August, inflation may rise into double digits in coming months, economists say.
The war in Ukraine has fueled inflation in Europe, with Russia sharply reducing supplies of cheap natural gas used to heat homes, generate electricity and run factories. That has driven up gas prices by 10 times or more.
European officials decry the cutbacks as blackmail aimed at pressuring and dividing the European Union over its support for Ukraine. Russia has blamed technical problems and threatened this week to cut off energy supplies if the West institutes planned price caps on Moscow's natural gas and oil.
The European Central Bank has lagged other central banks in raising rates. Central banks worldwide have scrambled after being wrong-footed by inflation fed by the war in Ukraine and the lingering effects of the covid-19 pandemic, which have sent energy prices higher and restricted supplies of parts and raw materials.
The sudden campaign to raise interest rates follows years in which borrowing costs and inflation stayed low because of broad trends such as globalization, aging populations and digitalization.
Lagarde rejected comparisons, saying that "we're not trying to mimic any other central bank" and pointing out that the European Central Bank started tightening monetary policy in December, when it decided to phase out its pandemic stimulus through bond purchases.
Some economists say the central bank's interest rate increases, including a half-point increase at its last meeting in July, could deepen a European recession predicted for the end of this year and the beginning of 2023, caused by higher inflation that has made everything from groceries to utility bills more expensive.
Lagarde said a 2022-23 recession would occur only under a "really dark" worst-case scenario where all Russian natural gas is cut off, alternative supplies are not available and governments have to resort to energy rationing.
She praised efforts by the EU's executive commission to contain energy prices, such as through electricity market regulation, and noted that while rate increases send "a strong signal" of the bank's commitment to fight inflation, "I cannot reduce the price of energy."
But the bank has reasoned that rate increases will prevent higher prices from being baked into expectations for wage and price deals and that decisive action now will forestall the need for even bigger increases if inflation becomes ingrained.
The Europeean Central Bank "wants to fight inflation -- and wants to be seen as fighting inflation," said Holger Schmieding, chief economist at Berenberg bank.
However, energy prices and government support programs to shield consumers from some of the pain will "have a much bigger impact on inflation and the depth of the looming recession than monetary policy," he said.
The European Central Bank's benchmark is now 1.25% for lending to banks. The Fed's main benchmark is 2.25% to 2.5% after several large rate increases. The Bank of England's key benchmark is 1.75%, and the Bank of Canada raised rates Wednesday by three-quarters of a point to 3.25%.
Information for this article was contributed by David J. Lynch of The Washington Post; Alexander Weber, Jana Randow and Carolynn Look of Bloomberg News; and David McHugh of The Associated Press.