– by Frank Siebelt
Frankfurt (Reuters) – Historical trouble at the European Central Bank: With the first interest rate hike in eleven years, the ECB is bracing itself against ever more escalating inflation.
The currency guardians around ECB boss Christine Lagarde acted more vigorously than they had previously promised. They decided on Thursday to raise the key interest rate by half a percentage point to 0.50 percent. The deposit rate was also raised by the same amount – to 0.00 percent. Banks no longer have to pay extra when they park excess money with the ECB. With this step, the euro central bank is introducing a comprehensive turnaround in its monetary policy. The euro watchdogs last raised interest rates in July 2011.
“The Governing Council of the ECB came to the conclusion that a larger first step in the course of its interest rate normalization than signaled at its last meeting is appropriate,” the euro central bank said. She held out the prospect of further interest rate hikes: At the next interest rate meetings, a further normalization of monetary policy would be appropriate, she explained. By bringing forward the exit from negative interest rates, currency holders could also start making interest rate decisions from one meeting to the next. The future interest rate path of the Governing Council of the ECB will continue to depend on the data situation.
“It’s good that the ECB has decided to raise interest rates by half a percentage point today,” commented Commerzbank Chief Economist Jrg Krmer on the ECB’s decision. “But that can only be a start.” The euro zone, with its profound inflation problem, needs a series of large interest rate hikes. Bastian Hepperle from Hauck Aufhuser Lampe Privatbank explained: “Ultimately, the inflationary pressure was too great and the inflation prospects too bad, so that the ECB Council decided to make a big move to the key interest rate.”
Inflation in the euro area climbed to a new record level of 8.6 percent in June, driven by skyrocketing energy prices in the wake of the Ukraine war. Inflation has been on the rise for months and the ECB has been criticized for recognizing the ongoing rise in inflation too late. Among the major central banks, the euro central bank is one of the monetary policy laggards. According to the International Monetary Fund (IMF), more than 70 central banks have raised their key interest rates since July 2021. Some have taken very aggressive action against the rise in inflation. The US Federal Reserve even increased its key interest rate by 0.75 percent in June – that was the largest rate hike since 1994.
The ECB is faced with a difficult economic situation. Because the fight against the persistent surge in inflation could slow down the economy, which is already burdened by the consequences of the Ukraine war and the increased commodity prices. Some economists believe it is possible that the euro zone could even slip into recession – especially if there are major bottlenecks in the gas supply over the course of the year. Sentiment among consumers in the euro zone continued to deteriorate in July, falling to a record low.
NEW TOOL TO SUPPORT INDEBT EURO COUNTRIES
In addition to the turnaround in interest rates, the currency holders agreed on a new crisis program with which the ECB can rush to the rescue of heavily indebted countries such as Italy in the event of turbulence on the bond market. The new tool (Transmission Protection Instrument TPI) is intended to help ensure that monetary policy can have an even effect in the euro area and that the financing costs of the individual euro states do not diverge. The TPI is intended to ensure that the monetary policy course arrives smoothly in all countries of the euro area. “The uniformity of the Governing Council’s monetary policy is a prerequisite for the ECB to be able to fulfill its price stability mandate,” the central bank said.
The extent of bond purchases under the TPI depends on the severity of the threats, the ECB said. According to the monetary authorities, the purchases are “not limited from the outset”. The ECB intends to announce more details about the new program in the course of the afternoon.
(Assistance Klaus Lauer, Reinhard Becker; edited by Sabine Wollrab. If you have any questions, please contact our editorial team at [email protected] (for politics and economics) or [email protected] (for companies and markets) .)