The European Central Bank raised interest rates by 0.5 percentage points in the midst of Italy’s political turmoil, promising to prevent rising borrowing costs from causing a debt crisis in the euro area. This is the first increase in more than 10 years.
The ECB Inflation higher than expected and new bond purchase schemes in a press release after a board meeting in Frankfurt. The central bank announced last month that it would raise interest rates by a quarter point.
The euro rose more than 0.6% against the dollar, surpassing $ 1.02. Concerns over global growth and inflation pushed the common currency below equality last week.
Eurozone government debt has been sold out. Yields on German 10-year bonds, which substitute for borrowing costs across the euro area, rose sharply after the announcement, rising 0.1 percentage points. Earlier Thursday, a rate hike and dismantling of the National Unity Union in Mario Dragi raised Italy’s 10-year bond yield by 0.24 percentage points to 3.6 percent.
The Board said it “protects the smooth transmission of monetary policy stances” under a new program established to address rising bond yields in countries beyond the level justified by economic fundamentals.
ECB Governor Christine Lagarde said that the size of bond purchases under this program is “unrestricted” and “unjust chaotic dynamics that pose a serious threat to the transmission of monetary policy throughout the euro area. Is activated to counteract. ” “.
Details of the new “Transmission Protection Device” (TPI) will be announced in another announcement at 3:45 pm Frankfurt time.
Central bank deposit rates will rise from minus 0.5% to zero, interest rates on major refinancing operations will rise from zero to 0.5%, and marginal lending facilities will rise from 0.25% to 0.75%. The last time we raised interest rates by 0.5 percentage points was in June 2002, a few years after the inauguration of the euro.
The central bank said interest rates would rise further at future meetings, adding that “advancing withdrawal from today’s negative interest rates will allow the governing council to move to a meeting-by-meeting approach to interest rate determination.”
This move is the first step in reversing the 10-year ultra-simple monetary policy at the ECB, which has maintained negative deposit rates to support the economy for the past eight years and bought bonds of around € 5 trillion.Tightening policy to work on records Eurozone inflation of 8.6 percent..
There is growing concern that rising interest rates could put the euro area in recession. The block has already been hit by soaring energy and food prices after Russia’s invasion of Ukraine, slowing business activity and record low consumer confidence.
The ECB decision was made a few hours later Draghi resigned As the Prime Minister of Italy. His planned exit is expected to trigger this year’s early elections.
Krishna Guha, Head of Policy and Central Bank Strategy for US investment bank Evercore, said: For the ECB. “
Political turmoil in Rome raises concerns about how rising interest rates will affect the sustainability of Italy’s bloated public debt, which is higher than most eurozone countries at 150 percent of GDP. Caused.
Officials in simpler countries such as Germany and the Netherlands are concerned that the ECB’s new bond-buying tools will promote fiscal health among member states and get lost in the government’s “financial lending.” Budget — This goes against the EU Treaties.
However, the ECB believes that new measures are justified to ensure that monetary policy is evenly distributed throughout the block. “By protecting the transmission mechanism, TPI will allow the Governing Council to more effectively fulfill its price stability obligations,” he said.
The ECB’s 50 basis point hike in key policy rates is set to begin raising 25 basis points beyond last month’s guidance, most despite the leak that it is considering a bigger move this week. It exceeded the expectations of economists.
Central banks are usually reluctant to break guidance. This is because there is a risk of damaging the credibility of the central bank. However, the ECB is under strong pressure from critics who criticize the eurozone’s slowdown in inflation. Inflation in the euro area reached a record high of 8.6% in the year to June.
The ECB lacks experience in raising rates. The last thing he did in 2011 was under then-President Jean-Claude Trichet, who was forced to reverse the move a few months later due to the sovereign debt crisis in the euro area. The only current members of the 25 governing councils who attended the last rate hike were Klaas Knot, who took over the Dutch central bank seven days ago.
The ECB is slower to respond to rising inflation than most central banks and lags behind the Federal Reserve, which is expected to rise by at least 75 basis points next week, comparable to a move of similar magnitude last month. ..