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The European Central Bank, responding to fears of runaway inflation, delivered its first rate hike in 11 years on Thursday — and made it a big one.
The ECB announced it would lift its key interest rates by 50 basis points, or half a percentage point, while also announcing the approval of a a new tool designed to keep yields on bonds of stressed eurozone countries from spiraling to unsustainable levels.
The ECB lifted the rate on its deposit facility to 0% from -0.5%, ending an era of negative rates. The refi rate and the rate on its marginal lending facility were lifted to 0.5% and 0.75%, respectively.
The move comes as the ECB attempts to rein in fears of runaway inflation, despite expectations an energy crisis resulting from Russia’s invasion of Ukraine will push the eurozone economy into a sharp slowdown or recession. ECB President Christine Lagarde is scheduled to hold a news conference at 2:45 p.m. Central European Time in Frankfurt, 8:45 a.m. ET.
The ECB last month had said it would deliver a quarter-point rate increase in July followed by a possibly larger move in September, but a news report earlier this week had said the ECB would consider lifting rates by a half point at Thursday’s meeting.
The report came after data last week showed eurozone consumer prices rose a record 8.6% on year in June after climbing 8.1% in May.
On Thurday, the ECB signaled further rate hikes were in store, but that the “frontloading” of its exit from negative interest rates had allowed it to “make a transition to a meeting-by-meeting approach to interest rate decisions,” language that ECB watchers described as ending a longstanding practice of “forward guidance.”
The ECB said its future policy rate path “will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term. In the context of its policy normalisation, the Governing Council will evaluate options for remunerating excess liquidity holdings despite fears that tightening could hasten a slide into a steep economic slowdown or recession as a result of Russia’s invasion of Ukraine.”
The ECB said it approved a new Transmission Protection Instrument, or TPI. The ECB said the TPI can be activated “to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante.”
The euro
EURUSD,
rallied after the decision, trading at $1.0248 from $1.0184 on Wednesday. The yield on the 2-year German bund
TMBMKDE-02Y,
shot up 15 basis points to 0.76% from 0.61% on Wednesday. European stocks
SX5E,
wobbled, with the Euro Stoxx 50 up 0.2% shortly after the decision.
