'Real-life Nightmare Before Christmas': ECB raises interest rates in inflation battle

General view of the European Central Bank in Frankfurt, Germany.

The European Central Bank raised interest rates for the fourth time in a row, although by less than at its last two meetings, pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation.

The ECB has been raising rates at an unprecedented pace to rein in prices that have soared since economies reopened after the Covid-19 pandemic, driven by supply bottlenecks and then surging energy costs following Russia's invasion of Ukraine.

The central bank for the eurozone raised the interest rate it pays on bank deposits from 1.5% to 2%, moving further away from a decade of ultra-easy policy after being wrong-footed by the sudden rise in prices.

But the decision marked a slowdown in the pace of tightening from 75-basis-point hikes at each of the ECB's two previous meetings, as inflation shows signs of peaking and a recession looms.

The decision was in line with economists' expectations and mirrored similar rate hikes at the Bank of England on Thursday and the US Federal Reserve on Wednesday.

"The Governing Council judges that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to the 2% medium-term target," the ECB said.

The ECB also laid out plans to stop replacing maturing bonds from its €5tn portfolio, reversing years of asset purchases that have turned the central bank into the biggest creditor of many eurozone governments.

The head of Communications at price comparison site bonkers.ie said the move is a "real-life Nightmare Before Christmas".

"Although the ECB’s move was widely expected, this is still probably the last thing tracker customers wanted to hear right before Christmas. Many are now looking at significantly increased repayments compared to only a few months ago," Daragh Cassidy said.

“The increase in mortgage costs is now surpassing the increase in people’s energy bills. In spite of this, tracker customers, especially those paying a margin of 1% or less, can take some comfort from the fact their rates are still relatively competitive.

“Those on variable rates will also likely see an increase in their repayments over the coming weeks. Although the main lenders have not yet hiked their variable rates in response to any of the previous ECB increases it’s hard to see this remaining the case for much longer."

Reuters