European Central Bank raises rates by 75 basis points

The European Central Bank on Thursday announced a 75 basis point interest rate rise, taking its benchmark deposit rate to 0.75%.

“This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target,” it said in a statement.

It added it “expects to raise interest rates further, because inflation remains far too high and is likely to stay above target for an extended period.”

Markets had largely priced in a 75 basis point hike, with the euro remaining flat against the British pound and rising slightly against the dollar to 1.0005. On Monday the euro dipped below 99 cents for the first time in 20 years.

The ECB move follows a hike from -0.5% to zero at its July meeting. The central bank, which sets monetary policy for the 19 euro-using nations, has kept rates in negative territory since 2014 in a bid to spur spending and combat low inflation.

The central bank now faces a very different problem, with consumer prices in the euro zone rising by 9.1% in August, setting a ninth consecutive record.

Inflation is being turbocharged by runaway energy prices, which have soared since Russia’s invasion of Ukraine in February. Price rises are also being seen in areas including food, clothing, cars, household appliances and services. Factors including ongoing supply chain issues and knock-on effects of recent heatwaves have helped drive up prices.

The ECB’s move indicates it is willing to sacrifice growth in order to combat these pressures.

Gross domestic product across the euro zone increased by 0.8% in the second quarter, however, many analysts say a euro zone recession is all-but-inevitable in the coming months as consumer spending power is squeezed and businesses struggle to pass on higher input costs.

As in the U.S., recession warnings come despite an extremely tight labor market, with unemployment across the bloc at a record low of 6.6%.

Thursday’s rate rise keeps the ECB below its “neutral” rate of between 1% to 2%.

Konstantin Veit, portfolio manager at investment firm Pimco, told CNBC‘s “Squawk Box Europe” Thursday that it was now “uncontroversial” within the Frankfurt-based institution to get within this range before the end of the year.

The “more interesting” question now, he said, was what its “terminal rate” — the highest point— will be during this hiking cycle.

Markets will now be hunting for clues as to whether it will move above the neutral range into tightening territory.