The European Central Bank has raised its three key interest rates by 75 basis points, bringing its main refinancing rate to 1.25 per cent.
The move, which had been expected and was already priced into bond markets, came despite concerns over a possible recession in the eurozone.
"This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2 per cent medium-term target," the ECB said in a statement.
It added its Governing Council expected to raise interest rates further over the next few meetings to dampen demand and guard against the risk of persistently high inflation.
According to Eurostat’s flash estimate, inflation reached 9.1 per cent in August, buoyed by soaring energy and food prices, and supply bottlenecks.
Looking ahead, the central bank has have significantly revised up its inflation projections, which is now expected to average 8.1 per cent in 2022, 5.5 per cent in 2023 and 2.3 per cent in 2024.
The Bloomberg Pan-European Aggregate Index, which tracks fixed-rate, investment-grade securities issued in European currencies, remained flat after it has already slumped 15.60 per cent over the year.
The euro remained at close to parity with the dollar after some light fluctuations following the announcement.
Analysts at JPMorgan, Goldman Sachs and Bank of America had previously said they expect the ECB to raise rates by 0.75 percentage points at its next meeting.
Following today's announcement, the main refinancing rate is 1.25 per cent, the rate on the marginal lending facility is 1.5 per cent, and the deposit facility is 0.75 per cent with effect from September 14.
The rate hikes come despite concerns over a looming recession.
The ECB today said recent data pointed 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.
Accordingly, its projections for economic growth have been revised down to 3.1 per cent in 2022, 0.9 per cent in 2023 and 1.9 per cent in 2024.
The bank said it will continue to fully reinvest principal payments from maturing securities purchased under the asset purchase programme for "as long as necessary" to maintain liquidity.
It will also reinvest payments from maturing securities purchased under the covid emergency programme until at least the end of 2024.
Rob Clarry, investment strategist at Evelyn Partners, said: "The decision to raise interest rates comes as no surprise in what has been a dramatic couple of weeks for the Eurozone.
"In the run up to the meeting, European natural gas prices have been incredibly volatile – driven by Russia’s decision to turn off the Nordstream 1 gas pipeline last Friday. European policymakers had been expecting this, but it did spook markets given Europe’s dependence on Russian gas."