(Bloomberg) -- The European Central Bank doubled its key interest rate to the highest level in more than a decade, intensifying its broadside against record inflation in the face of a likely recession.
Policymakers in Frankfurt delivered a second straight three-quarter-point hike on Thursday -- as economists expected. That brings the deposit rate, which was below zero as recently as July, to 1.5%.
In plowing on with increases even as energy-market turmoil batters the 19-nation euro-zone economy, the ECB reaffirmed its commitment to wrest back control over prices that are surging at five times the 2% target.
The move matches the recent pace of the Federal Reserve, whose assault on inflation began earlier, and has boosted the dollar at the euro’s expense. Canada, however, wrong-footed investors on Wednesday by unexpectedly slowing the speed of its monetary tightening as its economy flirts with a downturn.
“Inflation remains far too high and will stay above the target for an extended period,” the ECB said in a statement. “The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.”
Money markets pared rate-hike wagers slightly, pricing 56 basis points of tightening in December versus 58 basis points earlier.
Officials also toughened the terms on more than €2 trillion ($2 trillion) of ultra-cheap pandemic-era loans to banks known as TLTROs. The agreements had become problematic after the recent rapid rate hikes allowed lenders to park TLTRO cash in ECB accounts and earn a risk-free income.
Changing the conditions retroactively carries legal risks and could make banks wary of similar offers in the future, undermining their effectiveness. Deutsche Bank Chief Financial Officer James von Moltke said Wednesday he’d be “disappointed” if the terms were adjusted as banks signed up “faithfully” to keep credit flowing.
Officials also cut the interest they pay on the reserves banks are required to hold at the ECB to match the deposit rate.
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With President Christine Lagarde and her colleagues moving in increments that appeared almost inconceivable earlier this year, the focus is shifting to how high borrowing costs can be lifted as households grapple with surging heating and mortgage bills.
Some officials have publicly indicated that Thursday’s move might not be the last of that magnitude -- a topic Lagarde will be quizzed on when she holds a news conference at 2:45 p.m. local time. Analysts polled by Bloomberg see the deposit rate peaking at 2.5% in March, though they expect the pace of hikes to ease after this month.
Determining the appropriate dose of monetary tightening will be tough. While natural gas prices, which shot up after Russia invaded Ukraine, have fallen more than two-thirds since the summer, officials fret that inflation is broadening across goods and services and could spur expectations for further gains.
What’s more, politicians are starting to push back against rapidly rising borrowing costs as their economies buckle under the weight of the energy crisis. Italy’s new prime minister, Giorgia Meloni, used her first speech to parliament to criticize rate increases, while French President Emmanuel Macron has also grumbled.
The ECB’s hikes will eventually be complemented by efforts to reverse bond-buying that formed part of the stimulus response to recent crises. A debate has begun on shrinking its €5 trillion ($5 trillion) in debt holdings -- a process known as quantitative tightening -- though concrete action isn’t expected until next year.
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