FRANKFURT: The European Central Bank (ECB) raised interest rates by more than expected yesterday (July 21) as concerns about runaway inflation trumped worries about growth, even while the eurozone economy is suffering from the impact of Russia’s war in Ukraine.
The ECB raised its benchmark deposit rate by 50 basis points to 0%, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the ECB’s first rate increase in 11 years.
Policymakers also agreed to provide extra help for the eurozone’s big debtor nations – Italy among them – with a new bond purchase scheme. Sources told Reuters they did not expect to use it imminently despite a selloff in Italian bonds.
Ending an eight-year experiment with negative interest rates, the ECB also lifted its main refinancing rate to 0.50%, and promised another increase, possibly as soon as its Sept 8 meeting, with more to follow later.
ECB president Christine Lagarde said a clear deterioration of the inflation outlook and unanimous backing for the anti-fragmentation instrument justified the bigger move.
“Price pressure is spreading across more and more sectors,” Lagarde said. “We expect inflation to remain undesirably high for some time.” She listed driving factors including higher food and energy costs and wage rises.
“We decided on balance that it was appropriate to take a larger step towards exiting from negative interest rates.”
But even if the ECB is now moving more quickly, Lagarde said the terminal rate – or level where increases end – has not changed.
The ECB did not provide guidance for its expected rate hike in September, saying only that further increases will be as appropriate and decisions will be made meeting-by-meeting.
The euro climbed as much as 0.8% to US$1.0261, having traded at US$1.0198 just before the statement but turned negative on the day as Lagarde spoke.
The euro climbed to as high as US$1.0278 after the rate hike before easing back toUS$1.0183, flat on the day.Markets are now pricing in a 50 basis point rate hike in September and see a combined 127 basis points of rises over the rest of the year.
The new bond purchase scheme, called the Transmission Protection Instrument (TPI), is intended to stop any excessive rise in borrowing costs for governments across the currency bloc as policy tightens. – Reuters