ECB hikes interest rates for first time in 11 years as bloc faces looming Eurozone crisis | City & Business | Finance
The ECB raised its benchmark deposit rate by 50 basis points to zero, or twice as much as it had indicated after its previous meeting, in an effort to curb record-high inflation in the eurozone as the economy reels from the impact of Russia’s war in Ukraine. It also raised the rate on its weekly and daily cash auctions by 50 basis points to 0.50 percent and 0.75 percent respectively, and signalled that further increases in its three rates were likely to come this year.
Ending an eight-year experiment with negative interest rates, the ECB also increased its main refinancing rate to 0.50 percent and promised further rate hikes possibly as soon as its next meeting on September 8.
Europe’s bank said: “Further normalisation of interest rates will be appropriate.
“The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.”
The euro rose around 0.7 percent after the European Central Bank decision.
Peter Kinsella, global head of FX strategy at UBP said: “They have started off with 50 bps which is a very strong move.
“My view was they would do 50 only if they had a strong plan to deal with Italian spread and leaving the PPI open-ended is a very sensible thing, saying they will step in only if spread developments are blocking the transmission of monetary policy.
“They have been pretty clever in this respect, they have put the Italian situation on ice so markets’ narrative will focus on core rates.
The bigger-than-flagged move came as officials fear losing control with runaway consumer price growth as inflation approaches double-digit territory. Record-high inflation is now at risk of rising above the ECB’s two per cent target, requiring rate hikes even if that slows – or crashes – an economy suffering from the impact of Russia’s illegal war in Ukraine.
The ECB is also expected to announce a new tool aimed at capping member countries’ borrowing costs when they are deemed to be out of sync with economic reality.
But officials are far from united on just how fast the ECB should move with some arguing that it is already a long way behind the curve, especially compared to global peers like the US Federal Reserve, while others have warned the bank could further exacerbate a looming recession.
The bank until recently was signalling a 25 basis point increase to be followed by a bigger move in September, but sources close to the discussion said a 50 basis point increase would also be on the table on Thursday as the inflation outlook is deteriorating quickly.
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Along with today’s rate hike, the ECB is also set to signal a string of subsequent increases.
It already flagged a 50 basis point hike for September and that is likely to remain on the cards.
Bank BNP Paribas said in a note: “Our central case is for a 50 basis point hike in September, but we think the Governing Council will leave the door open for a larger move.
“We still expect a 50 basis point hike in October.”
