San Francisco Frontiers - ECB unveils another jumbo rate hike to tackle inflation

The ECB's 25-member governing council repeated last month's unprecedented move and opted for another increase of 75 basis points, leaving its three main rates sitting in a range of between 1.5 and 2.25 percent.

The hike was widely expected and comes as the Frankfurt institution faces pressure to rein in record-high inflation, mainly driven by skyrocketing energy costs in the wake of Russia's war in Ukraine.

Eurozone inflation stood at 9.9 percent in September, nearly five times the ECB's two-percent target.

In its statement, the ECB warned that inflation "remains far too high" in the 19-nation currency club, blaming "soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand".

Like other central banks, the ECB is fighting back with a series of rate hikes intended to dampen demand by making credit more expensive for households and businesses.

But higher borrowing costs also dampen economic activity, and signs are multiplying that the eurozone outlook has deteriorated.

In its determination to bring down price pressures, the ECB "has turned a blind eye on recession risks", said ING economist Carsten Brzeski.

- Political grumbling -

Moscow's move to curb gas supplies to Europe has triggered an energy crisis on the continent, fuelling fears of power shortages and sky-high heating bills this winter.

If Russia completely cuts off gas flows to Europe, the eurozone economy could shrink by nearly one percent in 2023, ECB vice-president Luis de Guindos has warned.

That scenario has become more likely after Russia in late August shut down the crucial Nord Stream 1 pipeline to Europe's economic powerhouse Germany.

The German economy is already forecast to shrink by 0.4 percent next year.

As European governments race to unveil multi-billion-euro support measures to help citizens through a cost-of-living crisis this winter, the ECB's monetary policy tightening has come under increased scrutiny.

Italian Prime Minister Giorgia Meloni this week slammed the ECB's "rash choice" to aggressively hike rates, saying it created "further difficulties for member states that have elevated public debt".

French President Emmanuel Macron has expressed "concern" that the ECB was "shattering demand" in Europe.

ECB president Christine Lagarde will likely be quizzed about the political grumbling at her 1245 GMT press conference in Frankfurt.

Lagarde can also expect questions on how the ECB plans to bring other monetary policy levers in line with its inflation-busting efforts, including unwinding its massive balance sheet.

- Excess liquidity -

The governing council on Thursday already moved to limit the benefits gained by eurozone banks from super-cheap loans issued at ultra-low rates during the pandemic.

The interest rate for so-called TLTRO III loans would rise, the bank said, and lenders will be offered "additional voluntary early repayment dates".

As an unintended consequence of the ECB's rate hikes, lenders are currently able to make an easy profit by parking their excess TLTRO cash at the ECB and pocketing the new, higher deposit rate.

This is not considered a good look at a time when many consumers and companies are struggling, and the ECB had signalled it wanted to make the loan scheme less generous.

"The optics are bad against the backdrop of a historical shock to households' income, and political pressure cannot be ignored," said Pictet Wealth Management economist Frederik Ducrozet.

The ECB is also considering how best to shrink its five-trillion-euros bond portfolio, after years of hoovering up government and corporate debt to drive up stubbornly low inflation.

But the statement made no mention of any decisions on the issue.

Given the economic uncertainty and the risk of rattling financial markets, analysts say the start of any "quantitative tightening" -- letting the bonds mature or actively selling them -- is some way off.

S.Hall--SFF