The European Central Bank (ECB) decided this Thursday to raise its interest rates by half a percentage point, to 0.50 percent, the first rise in eleven years, to stop the euro zone inflationwhich shot up in June to 8.6 percent.
After the meeting of the Governing Council, the ECB reported that it is also increasing the credit facility by 50 basis points, to which it lends to banks overnight, up to 0.75 percent, and the deposit facility, at the one that remunerates the excess reserves to one day, up to 0 percent.
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The increase was greater than what the entity had foreseen, of 25 basic points, or a quarter of a percentage point, although it was also going to discuss an increase of half a point.
Since the ECB has pointed to an increase in the price of money, the risk premiums of the countries of southern Europe have skyrocketed against the “Bund”, the ten-year German sovereign bond that serves as a reference, something known as fragmentation.
This is the first interest rate hike since July 2011. In addition, ECB interest rates have been at 0 percent since mid-March 2016 and the deposit facility rate has been negative since mid-March 2016. June 2014.
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“The Governing Council today decided to take important new steps to ensure that inflation returns to its 2 percent medium-term target,” the ECB said in a statement.
And he pointed out that a further normalization of interest rates will be appropriate in the next meetings of the Governing Council.
The early step out of negative interest rates agreed today allows the ECB to transition to an approach where interest rate decisions will be taken at every meeting.
The future path of the official interest rates agreed by the ECB will depend on the inflation data. In addition, the ECB will evaluate the options for remunerating excess liquidity.
Equally, The ECB decided to approve the Transmission Protection Instrument (TPI).) so that the risk premiums of some countries in the euro area do not skyrocket.
“The new TPI instrument is necessary to support the effective transmission of monetary policy”, says the ECB. As long as the ECB raises its interest rates, the TPI will ensure the fluid transmission of the orientation of said policy to all the countries of the zone The TPI will be added to the ECB’s toolkit and can be activated to counter unwanted or disorderly market dynamics that pose a serious threat to the transmission of monetary policy in the euro area as a whole. purchases under the TPI will depend on the severity of the risks to policy transmission,” the ECB said in the statement.
For this reason, the central bank of the European Union has not established ex ante restrictions for debt purchases. To curb the rise in the risk premiums of peripheral countries, the ECB reinvests from July 1 the bonds it bought during the pandemic and that mature in a flexible way.
But this measure is not enough in the event of a major crisis as is happening now in Italy, a highly indebted country facing a new political crisis, and for this reason the ECB has approved this new instrument to curb speculation in the markets.