A Big Rate Increase to Fight Inflation

The European Central Bank raised interest rates on Thursday as policymakers try to bring down high inflation caused by soaring energy prices, but warned of an economic downturn.

In the very early days of the eurozone, the bank increased its key rates by three-quarters of a percentage point. In order to send a strong signal to consumers and businesses that inflation will be brought back to their targets, central banks around the world have pushed rates higher.

Policymakers in Europe are fighting high prices in the face of growing expectations that the energy crisis will cause a recession in Europe.

Projections for the rest of the year were scaled back.

The staff of the bank has raised its inflation forecast to 8.1 percent this year, but it will ease to 5.5 percent in the years to come.

With high energy prices continuing to weigh on businesses and individual households, policymakers expect to raise interest rates further to damp demand and guard against the risk of a persistent upward shift in inflation expectations. The eurozone's annual inflation rate increased to 9.1 percent in August from 8.9 percent the previous month. A medium-term inflation rate of 2% is the central bank's target.

Anatoli Annenkov, an economist at Société Générale, wrote in a note to clients last week that inflation is inescapable and there is no room for caution.

With inflation in the eurozone ranging from 6.5 percent in France to 25.2 percent in Estonia, and the region's economic outlook worsening, the bank's statement confirmed assumptions that more interest rate increases are ahead. There is so much uncertainty about the future path of prices that policymakers argue that keeping inflation expectations low needs strong action.

Some people think that an economic downturn shouldn't stop the fight against inflation.

Isabel Schnabel, a member of the bank's executive board, said at the end of last month that the cost of high inflation is uncomfortably high. The central banks need to act forcefully.

The bank won't have to respond as aggressively if the economy slows, according to some other policymakers. Philip Lane is the bank's chief economist.

One of the last major central banks to raise interest rates was the E.C.B., which moved more forcefully on Thursday. After a brief jump, the euro remained flat.

Policymakers held back on raising interest rates because of the uncertainty of the economic impact of the war in Ukraine. When the price increases in the eurozone were driven by energy and other international goods, the central bank expected inflation to slow quickly. It is trying to normalize the policy stance by raising interest rates. The Federal Reserve has raised interest rates to slow demand in an overheated economy.

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