European Central Bank raises interest rates for the first time in a decade

The ECB (European Central Bank) raised interest rates more than expected on Thursday (21), confirming that concerns over runaway inflation outweigh issues surrounding growth, even as the euro zone economy recovers. of the impact of Russia’s war in Ukraine.

The ECB raised its deposit rate by 0.50 percentage point to zero, breaking its own guidance of a 0.25-point move and joining global peers in rising borrowing costs. It was the first rate hike by the eurozone central bank in 11 years.

Ending an eight-year experiment with negative interest rates, the ECB also raised its key refinancing rate to 0.50% and promised further increases possibly as early as its next meeting on 8 September.

“Further interest rate normalization will be appropriate,” the ECB said. “Today’s anticipation of the exit from negative rates allows the Governing Council to transition to a meeting-by-meeting approach to interest rate decisions,” the ECB said.

The bank had for weeks guided markets to expect a 25-point increase, but sources close to the discussion said a 50-point increase was in play just before the meeting as indicators pointed to further deterioration in inflation prospects.

With inflation already approaching double digits, there is a risk that it will take root above the ECB’s 2% target, and any shortage of gas during the winter should drive prices even higher.

Economists polled by Reuters had predicted a rise of just 0.25 point, but most said the bank should in fact opt ​​for 0.50 point, raising its deposit rate from a record low of -0.5% to zero.

The ECB has also agreed to provide extra help to the most indebted countries in the currency bloc, approving a new bond-buying scheme called the TPI (Transmission Protection Instrument), designed to limit the rise in their borrowing costs and limit financial fragmentation.

“The scale of TPI purchases depends on the severity of the risks faced by the transmission of monetary policy,” the ECB said. “The ICC will ensure that the monetary policy stance is transmitted smoothly across all eurozone countries.”

When interest rates rise, borrowing costs rise disproportionately for countries like Italy, Spain or Portugal, as investors demand a higher premium to maintain their debt.

The ECB’s 50-point hike on Thursday still lags its global peers, particularly the Federal Reserve, which raised US rates 0.75 point last month and is expected to move in the same direction. margin in July.