The European Central Bank has raised interest rates by half a percentage point, its first increase in more than a decade, while pledging to prevent rising borrowing costs from causing a debt crisis. the eurozone amid political turmoil in Italy.
The central bank raised interest rates twice as much as it said it would last month, ending eight years of negative interest rates by raising its deposit rate to zero.
ECB President Christine Lagarde said on Thursday afternoon that it was “time to comply” after inflation in the eurozone reached a new record high of 8.6% during the year to June, more than four times the central bank’s 2% target.
Politicians simultaneously agreed on a new bond-buying program aimed at counteracting a disorderly rise in the cost of borrowing for the region’s most vulnerable governments. “The ECB is able to go big,” Lagarde said, then added, “We prefer not to use [the new programme]but if we have to use it, we will not hesitate. ”
The ECB has had to follow a narrow path between responding to inflation and avoiding dragging the region into a recession. The bloc has already been hit by rising energy and food prices following the Russian invasion of Ukraine, a slowdown in business activity and a drop in consumer confidence to historic lows. The ECB’s decision came hours after Mario Draghi resigned as prime minister of Italy. His planned departure is expected to trigger early elections this year.
Krishna Guha, head of policy and strategy at US investment bank Evercore’s central bank, said before Thursday’s decision: “The combination of a giant stagflationist shock of Russian natural gas beer armed and a crisis politics in Italy is almost as close to a perfect storm as one can imagine for the ECB. “
The ECB has been slower than most central banks in responding to rising inflation and is lagging behind the US Federal Reserve, which is expected to raise rates by at least 75 basis points next week, as well as a similar move last month.
The euro initially appeared with the ECB’s announcement, but then cut gains against the dollar to trade at $ 1.019. Carsten Brzeski, head of macro research at Dutch bank ING, said investors were absorbing the likelihood that the ECB would raise rates less than expected in the future after it “weakened its previous orientation” in move to a “meeting-by-meeting approach” to interest rate decisions ”.
Lagarde said discussions within the bank’s governing board had evolved around a trade-off between the need to tackle inflationary pressure with a bolder rate hike, while designing a new bond-buying scheme that would prevent euro area spreads would be widened for reasons other than justified. for economic reasons.
Recommended
The size of bond purchases under the new program, the “Transmission Protection Instrument” or TPI, had “no limitations”. said Lagarde. It aimed to ensure that the monetary policy of the central bank had the desired impact throughout the euro area.
Although support for the program was unanimous, there was only a “consensus” on the scale of the rate increase.
Political unrest in Rome has raised concerns about how rising interest rates will affect the sustainability of Italy’s public debt to 150 percent of gross domestic product.
Italian debt was sold on Thursday, with the country’s 10-year bond yield rising 0.24 percentage points to 3.6% as Draghi’s national unity coalition disbanded and the ECB raised rates. The fall in Rome bond prices meant that the gap between Italian and German benchmark yields, a closely watched indicator of market stress, yawned to 2.3 percentage points, reflecting an increase of about 0 , 3 percentage points in just two days.
The last time the ECB raised rates, under then-President Jean-Claude Trichet, it was forced to reverse the move a few months later, as the eurozone was hit by a sovereign debt crisis. .
The central bank said rates would rise further in future meetings, adding: “The anticipated burden today of the exit of negative interest rates allows the governing council to make a transition to a meeting-by-meeting approach. interest rate decisions “.
Lagarde said there are still “upside risks” to inflation, codifying for the possibility that price pressures will remain stronger than the ECB’s forecasts suggest.
The ECB’s rate on its main refinancing operations rose from zero to 0.5% and the rate on its marginal lending facility rose from 0.25% to 0.75%.
The last time it raised interest rates by half a percentage point was in June 2000, just over a year after the launch of the euro.