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Dec. 15 (UPI) -- The European Central Bank Thursday raised its three key interest rates by half a percent and said it expects to raise them further based on "substantial upward revision" to the inflation outlook. In a statement, the ECB said the half-point increase brings the main refinancing operations rate to 2.5%, marginal lending facility rates to 2.75% and deposit facility rates to 2%.
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"We judge that interest rates will still have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target," the ECB said in its statement. "Keeping interest rates at restrictive levels will over time reduce inflation by dampening demand and will also guard against the risk of a persistent upward shift in inflation expectations."
During an ECB press conference, the bank said inflation in Europe will reach 8.4% in 2022 before decreasing to 6.3% in 2023.
"We decided to raise interest rates today, and expect to raise them significantly further, because inflation remains far too high and is projected to stay above our target for too long," ECB President Christine Lagarde said.
The ECB said it expects inflation to average 3.4% in 2024 and 2.3% in 2025. The bank's inflation goal is a sustainable 2%.
The bank said the euro area economy may contract in the current quarter and the next one. But ECB expectations are that a recession will be "short-lived and shallow."
"Overall, the Eurosystem staff projections now see the economy growing by 3.4% in 2022, 0.5% in 2023, 1.9% in 2024 and 1.8% in 2025," the ECB said in a statement.
The bank cautioned that any fiscal support to shield the economy in Europe from the impact of high energy prices should be temporary, targeted and tailored to preserve incentives to consume less energy. The ECB said if fiscal measures fall short of these principles, they are likely to make inflation worse.
The Bank of England said also Thursday it's raising interest rates by half a percentage point to 3.5% as monetary policy continues to fight inflation.
The bank's Monetary Policy Committee voted 6-3 to raise the Bank Rate and said additional interest rate hikes may be needed to achieve a sustainable drop in inflation back to target rates near 2%.
"The Committee has voted to increase Bank Rate by 0.5 percentage points, to 3.5%, at this meeting," the Bank of England said in a statement. "The labor market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response."
Britain's Consumer Price Index shows annual inflation at 10.7% over the 12-month period ending in November. That's down from 11.1%, so inflation is cooling, but it is far from the Bank of England's 2% annual inflation target.
The Bank of England statement said that the "economy was expected to be in recession for a prolonged period and CPI inflation was expected to remain very high in the near term. Inflation was expected to fall sharply from mid-2023, to some way below the 2% target in years two and three of the projection."
The bank's Thursday statement said British GDP is expected to drop by 0.1% for the 2022 fourth quarter, which is 0.2% stronger than was expected in the bank's November report.
Meanwhile, the British labor market remains tight with unemployment at 3.7%. Private sector pay growth for workers was 6.9%, 0.5% stronger than expected in the bank's November report.
"CPI inflation is expected to continue to fall gradually over the first quarter of 2023, as earlier increases in energy and other goods prices drop out of the annual comparison,"
While the Energy Price Guarantee subsidy limited energy price inflation, the bank said household energy bills are still rising.
"There are considerable uncertainties around the outlook. The Committee continues to judge that, if the outlook suggests more persistent inflationary pressures, it will respond forcefully, as necessary," the Bank of England noted, as it projected how the bank expects the British economy to perform.
