ECB lifts rate, and more rises may come

Policymakers at the European Central Bank have warned that key interest rates could go up further after they were raised by an unprecedented 0.75 percentage point in a bid to meet the bank's 2 percent inflation rate target.

Many policymakers saw a growing probability that they will need to further raise the rates to a "restrictive territory" level, or level of rates that will force the economy to slow, Reuters cited five anonymous sources as saying.

This would most likely happen if the ECB's first inflation projection for 2025, due to be published in December, is still above 2 percent, the sources said.

The ECB currently sees inflation at 2.3 percent in 2024.

The central bank raised its key rates to 1.25 percent on Thursday to combat rising inflation, which has jumped to 9.1 percent, amid soaring energy costs.

In July, the bank made its first increase in more than 11 years.

"This major step frontloads the transition from the prevailing highly accommodative level of policy rates toward levels that will ensure the timely return of inflation to the ECB's 2 percent medium-term target," the ECB said in a statement.

The United States Federal Reserve recently implemented a similar hike, and the Bank of England will now feel pressure to follow when its policymakers meet next week, The Guardian reported.

The ECB said inflation remains far too high and is likely to stay above target for an extended period.

Price pressures

"Price pressures have continued to strengthen and broaden across the economy and inflation may rise further in the near term. As the current drivers of inflation fade over time, and the normalization of monetary policy works its way through to the economy and price-setting, inflation will come down," it said in a statement.

ECB President Christine Lagarde said more increases would be required to reach the target.

"We have a goal, we have a mission. We have incredibly high inflation numbers, we are not on target in our forecast and we have to take action," she said.

"What we know is that we want to get that 2 percent medium-term target and we will take the necessary steps along the way in order to get there."

Lagarde said the central bank had no control over surging energy costs, and added that if gas prices continue to rise, it would bring a recession.

Analysts said there was a risk that hiking interest rates could lead to slower growth as consumers and businesses delay spending.

The Guardian quoted Carsten Brzeski, eurozone economist at ING Bank, as saying the economy "is far from overheating and will almost inevitably fall into a winter recession, even without further rate hikes".