European Central Bank opts for historic rate hike amid surging inflation

The European Central Bank (ECB) on Thursday hiked its three key rates by 75 basis points in a historic move as eurozone inflation faces a record-high and war-driven energy crisis, creating new risks for the entire region.

"The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 1.25%, 1.50% and 0.75% respectively," it said in a statement.

July was the first time in over a decade that the bank raised rates by 50 basis points as annual inflation in the euro area spiked to 8.6% in June, far above the ECB's 2% target.

Euro area annual consumer inflation jumped to a new record high of 9.1% in August.

"Soaring energy and food prices, demand pressures in some sectors owing to the reopening of the economy, and supply bottlenecks are still driving up inflation," the bank explained.

It warned that price pressures have continued to broaden across the economy, signaling further interest rate increases in coming period, as "inflation remains far too high, likely to stay above target for extended period."

Markedly revising up inflation projections, it now expects an 8.1% average in 2022 and 5.5% in 2023.

The bank also raised its eurozone growth forecast to 3.1% in 2022, while diminishing it to 0.9% in 2023 and to 1.9% in 2024.

"After a rebound in the first half of 2022, recent data point to a substantial slowdown in euro area economic growth, with the economy expected to stagnate later in the year and in the first quarter of 2023," the bank said.

"Very high energy prices are reducing the purchasing power of people's incomes and, although supply bottlenecks are easing, they are still constraining economic activity," it added.

The bank also said the Russia-Ukraine war was weighing on the confidence of businesses and consumers.