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

By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) – The European Central Bank raised interest rates more than expected on Thursday, as concerns over runaway inflation outweighed growth concerns even as the euro zone economy rebounds from the impact of the war. of Russia in Ukraine.

The ECB raised its deposit rate by 0.50 percentage point to zero, going beyond its own guidance of a 0.25-point move and joining global peers in rising borrowing costs. This 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.

At a news conference, ECB President Christine Lagarde responded to repeated questions about the ECB’s divergence from its original monetary tightening plans and how a new yield cap tool will fit into its anti-inflation mandate.

“Price pressure is spreading to more and more sectors,” said Lagarde. “We expect inflation to remain undesirably high for some time.” She listed driving factors behind this, including higher food and energy costs and salary increases.

Lagarde said ECB officials unanimously decided that the increasingly evident “materialisation” of inflation risks to the economy, as well as their agreement to support indebted nations if necessary, justified the sharper-than-expected rise in interest rates. .

“We decided on the balance that it was appropriate to take a bigger step out of negative interest rates.”

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 expected an interest rate hike of just 0.25 point by the ECB, but most said the bank should indeed opt for 0.50 point, raising its deposit rate from a record low of -0.5%.

EXTRA HELP

The ECB also agreed to provide extra aid to the most indebted countries in the currency bloc, including Italy, by approving a new bond-buying scheme called the Transmission Protection Instrument (TPI) designed to limit the rise in your 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 U.S. rates 0.75 point last month and is expected to make a similar move in July.

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