The European Central Bank (ECB) has raised rates by an unprecedented 0.75% yesterday in response to the recent surge in inflation, ratcheting up the pace of policy tightening as both the Federal Reserve and the Bank of England have done in recent months.

It is very much prioritising getting inflation back under control even as the economy looks headed into recession later this year, many industry officials have found. This move can only add to the pressure on the BoE to follow suit with a 0.75% rise next week, particularly with the news of the UK government’s large scale intervention to cap household and business energy bills.

“Only in the financial crisis of 2008 was there something comparable, but in the opposite direction. This shows the seriousness of the situation,” said Jorg Zeuner, chief economist at Union Investment.

“At the same time, the monetary authorities are also sending a clear signal to savers: the zero interest rate policy has come to an end. In the next two meetings until the end of the year, the ECB is likely to raise interest rates by a further 50 and 25 basis points (bps), respectively,” he said.

Yesterday’s record interest rate hike is likely to be a concession to the hawks in the Governing Council so that they do not push for an early end to the refinancing of maturing bonds from the asset purchase programme (APP), Zeuner explained.

“A reduction in the balance sheet would weigh on bonds from peripheral euro area countries in a tense market situation and would therefore be inconvenient,” he said.

Zeuner added: “The inflation risks posed by energy prices are too great. The capital markets could therefore continue to be driven by speculation throughout the winter that the central bank is turning the screw on interest rates even more than has been priced in so far. Accordingly, it remains volatile on the stock exchanges”.

Kaspar Hense, senior portfolio manager at Bluebay Asset Management, expects the central bank to continue to hike rates by another 75bps in October.

“We think that their base case on growth is still too optimistic and it is most likely that the long-term inflation outlook will come down in the December forecasts again, and will likely sit at or below the 2% target, indicating a pause and potentially the peak of their hiking cycle already,” he said.

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