The European Central Bank raised its key interest rates by an unprecedented 75 basis points and signalled further hikes, prioritising the fight against inflation even as the economy is heading for a likely winter recession.

With inflation at a half-century high and approaching double-digit territory, policymakers are worried that rapid price growth could become entrenched.

This would erode the value of household savings and setting off a wage-price spiral.

Following up on its July rate hike, the ECB raised its deposit rate to 0.75% from zero and lifted its main refinancing rate to 1.25%, their highest levels since 2011, with further moves anticipated in October and December.

"We have more journey to cover going forward," ECB President Christine Lagarde told a news conference.

She added that there had been unanimous agreement among policymakers about the need for a 75-basis point hike to "frontload" the move towards rates consistent with bringing inflation to its 2% mid-term target.

The interest rate hikes will increase repayments for over 400,000 tracker and variable mortgage holders here.

Policymakers had for weeks oscillated between a 50 and a 75 basis-point increase, but another jump in both headline and underlying inflation appears to have settled the debate as figures indicate that price growth is now seeping into the broader economy, making it even harder to root out.

Indeed, the ECB raised its inflation projections once again, lifting the 2023 outlook to 5.5% from 3.5% and putting the 2024 rate at 2.3%, above its 2% target.

Markets were little surprised, however, as investors had already priced a more than 80% likelihood of a 75 basis-point move, even if economists polled by Reuters were more evenly split, showing only a slight majority expecting the larger move.

With the ECB statement explicitly saying more rate hikes would be needed, markets continue to expect another 50 basis points at the ECB's October meeting.

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Asked about the future direction and pace of rate changes, Ms Lagarde said: "We didn't say 'raise at 75' as if 75 is the norm - it is not."

Going into the meeting, conservatives feared that anything other than an outsized move would signal that the ECB was not serious about its inflation-fighting mandate - officially its sole objective.

That risked pushing up already high long-term inflation expectations, which would signal a loss of confidence in the ECB and raise questions about the bank's inflation-targeting framework.

Bank of Ireland and AIB tracker rates to rise on ECB hike

ECB President Christine Lagarde speaking at today's press conference in Frankfurt

Timid action also risked weakening the euro and boosting inflation further through more expensive energy imports.

The euro has been languishing around parity against the dollar for weeks, not far from a two-decade low hit earlier this month.

That means more expensive exports of everything from oil to cars, which then raises prices for consumer.

Policymakers have also made the case for frontloading rate hikes partly to send a strong signal about the ECB's inflation-fighting commitment and partly to get most of the hikes done before the onset of a recession becomes evident.

With high energy prices sapping purchasing power, a downturn is essentially inevitable. However, monetary policy is mostly powerless against a supply-shock driven downturn, firming the argument for hikes even if the economy suffers.

Some policymakers are now openly talking about a recession, and the ECB's new projections also show sharply lower growth in the coming years.

Still, a shallow recession may even be useful, some argued, as the bloc's labour market is increasingly tight and a downturn could provide relief to firms now struggling to find workers.

The bank sees the euro zone economy expanding by 3.1% this year and 0.9% in 2023. While this year's growth projection was lifted a touch, it was lowered sharply for 2023.

However, Ms Lagarde said its so-called "downside" scenario - involving a total shutdown of Russian gas supply and policies including energy rationing - would plunge the euro area into a recession next year, with a 0.9% contraction foreseen.

Speaking before today's ECB decision, Trevor Grant, Chair of the Association of Irish Mortgage Advisors, said that 285,000 tracker mortgage holders will be directly impacted by an interest rate hike by the ECB.

"There is about 285,000 tracker mortgager customers in Ireland. For every 0.5% of an increase per €100,000 that you owe you can effectively expect to see your mortgage payments increase by €25 a month. And if the rates go up by 0.75% for every €100,000, you can expect to see your repayments go up by €37 per month," he said on Morning Ireland.

"It is very difficult to know what the average is because of mortgage terms and balances but you are going to see repayments essentially go up, most people by at least €75 per month if the 0.75% announcement is announced. And obviously the larger the mortgage the greater the increase will be," he added.

He said there was a surprise in July when the 0.5% increase was announced by the ECB as an increase of 0.25% had been expected.

Mr Grant said it is hard to know if those looking to get a mortgage will be impacted by this next increase.

"There are no longer tracker mortgages available. The variable rates were not increased by the banks the last time there was an increase. That was down to the fact they are just too high anyway. And not all fixed rates for new customers were impacted," he stated.

He said over 80% of new mortgage holders take fixed rate mortgages for many reasons including for security purposes.

John Finn, Managing Director of Treasury Solutions said ECB rates would likely go over 2% over the next 12 months.

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"We've had zero rates for so long. The new norm will be around 2% to 2.25%," he told Morning Ireland.

He said he did not see much prospect of the ECB backtracking on rate hikes in the face of a deteriorating economic backdrop.

"We've had artificially low rates for so long and with inflation running as high as it has, even if it settles back to 3% or 4%, you'd still expect interest rates of around 2%, so I can't see that happening," he explained.

Mr Finn said he was surprised that the main retail banks had not moved their rates upwards in response to the interest rate hike of 0.5% announced by the ECB in July, but he said he expected them to move after today's rates decision.

The one bright side to rate increases is that depositors can expect to get some money on their savings after many years of low or negative deposit rates.

"We're seeing it already. Large companies were being charged to put their money on deposit. That's disappeared in the last few weeks. There's some light on the horizon for depositors at least," he concluded.

Altaf Kassam, EMEA Head of Investment Strategy & Research at State Street Global Advisors, said today's move seemed inevitable as the ECB strove to regain its credibility given August's inflation surprise.

"Going forward, we expect the ECB to slow its pace of rate rises, hiking another 50bps in October and 25bps in December – yielding a policy (deposit) rate of 1.50% by year-end," he said.