The ECB, more aggressive than expected, ends the era of negative rates
The European Central Bank raised its main interest rate by 0.50 points on Thursday, the highest level for 11 years. “The economic horizon is darkening,” according to its president.
This is the first increase in more than ten years in the face of galloping inflation in the euro zone.
KEYSTONE
The European Central Bank (ECB) decided on Thursday to raise interest rates for the first time in more than a decade, surprising with a bigger-than-expected hike to fight inflation and despite Italy’s political crisis.
The main interest rate thus goes from zero, the level where it has been camped since 2016, to 0.50%, while that taxing part of the bank liquidities not distributed in credit, goes up from -0.50% to zero.
The decision on this turn of the screw was “unanimous” in the face of inflation which “will remain at an undesirable high level for some time”, according to the president of the institution Christine Lagarde.
The President of the ECB reacted after the decision to raise rates for the first time since 2011 in an attempt to stem the rise in prices.
AFP
The rise in prices in the euro zone -8.6% in June- continues to increase under the combined effect of the post-Covid recovery, tensions in supply chains and the energy crisis linked to the Russian offensive in Ukraine.
The ECB thus closes the era of negative interest rates that began in 2014 and closes a decade of generous monetary policy that has stimulated the economy during the crises of recent years.
“Rate normalization”
After this strong impetus, the ECB will “continue the normalization of rates” and this “meeting by meeting”, assured Christine Lagarde.
The next monetary meeting is scheduled for September with new economic forecasts.
“Eurozone inflation over the rest of the year will remain high and the pressure on the ECB to act will also be high in the short term,” said Konstantin Veit, portfolio manager at Pimco.
This “historic” decision reflects the fear of the guardians of the euro to see the window of opportunity for an interest rate hike close, analyzes Carsten Brzeski, of ING bank.
complex task
This tightening of monetary policy in the euro zone had already begun in July with the end of new debt purchases on the markets.
The other central banks have been much more active for months against soaring prices, such as the American Fed which took off its rates in March.
But the ECB’s task is more complex due to the growing threats of cuts in Russian gas supplies, the risk posed by the political crisis in Italy and the fall of the euro.
“The economic horizon is darkening” and this “for the second half of 2022 and beyond”, summarized ChristineLagarde.
In Italy – one of the most vulnerable economies in the monetary zone – the Prime Minister and predecessor of Christine Lagarde as head of the ECB, Mario Draghi, submitted his resignation on Thursday. Early elections will be organized.
Tool against speculation
To ward off the specter of a new sovereign debt crisis, the European Central Bank also announced on Thursday a new instrument to protect the most fragile states against speculative attacks that increase their borrowing costs.
The ECB considers that these “spreads” – difference with the rate of the German risk-free loan – hinder the adequate transmission of its monetary policy.
Strict conditions for the use of this tool, known as the “transmission protection instrument” (IPT), have been defined, as the guardians of the euro can be accused of carrying out disguised state funding.
Christine Lagarde evaded repeated questions about whether Italy could be the first country to benefit from the ECB’s umbrella.
The institute “does not take a position on internal political issues,” assured the former boss of the IMF.
But if necessary, the ECB “will not hesitate” to use the IPT because it is “capable of doing things big”, she hammered.
AFP
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