The European Central Bank has raised interest rates by half a percentage point, its first increase in more than a decade, while pledging to prevent rising borrowing costs from causing a debt crisis. the eurozone amid political turmoil in Italy.
The ECB said in a press release after its governing council meeting in Frankfurt that it “considered it appropriate to take a larger first step in its policy-type standardization trajectory than what it pointed out at its meeting.” previous “due to higher-than-expected inflation and support. of its new bond purchase scheme. The central bank had said last month that it would raise rates by a quarter of a point.
The euro gained more than 0.6% against the dollar to exceed $ 1.02. Concerns about global growth and inflation pushed the common currency below parity last week.
Sell eurozone public debt. The 10-year German Bund yield, an indicator of eurozone-wide lending costs, rose sharply after the announcement, adding 0.1 percentage points. The rate hike and the disintegration of Mario Draghi’s coalition of national unity on Thursday made the 10-year Italian bond yield rise 0.24 percentage points to 3.6%.
His governing council said it would “safeguard the smooth transmission of its monetary policy stance” under a new program created to address any increase in bond yields from individual countries beyond the level justified by the economic fundamentals.
Christine Lagarde, President of the ECB, said the size of bond purchases under the program “was not restricted ex-ante” and would be activated “to counteract unwarranted disorderly dynamics that pose a serious threat to transmission.” of monetary policy in the euro area “. ”.
More details on the new “Transmission Protection Instrument” (TPI) will be given in a separate announcement at 15.45 Frankfurt time.
The central bank’s deposit rate will increase from less than 0.5% to zero, while the rate of its main refinancing operations will increase from zero to 0.5% and its marginal lending facility will increase from 0.25% at 0.75%. The last time it raised interest rates by half a percentage point was in June 2002, a few years after the launch of the euro.
The central bank said rates would rise further in future meetings, adding: “The anticipated burden today of the exit of negative interest rates allows the governing council to make a transition to a meeting-by-meeting approach. interest rate decisions “.
The measure is the first step in reversing a decade of ultra-easy monetary policy at the ECB, which has maintained a negative deposit rate and bought nearly 5 million euros in bonds to support the economy over the past eight years. It is tightening policy in an effort to deal with record euro area inflation of 8.6%.
Fears are growing that higher interest rates will bring the eurozone into recession. The bloc has already been hit by rising energy and food prices following the Russian invasion of Ukraine, a slowdown in business activity and a drop in consumer confidence to historic lows.
The ECB’s decision came hours after Draghi’s resignation as Italy’s prime minister. His planned departure is expected to trigger early elections this year.
Krishna Guha, head of policy and strategy at the US investment bank Evercore’s central bank, said: “The combination of a giant stagflationist shock of Russian natural gas beer armed and a political crisis in Italy is so near a perfect storm as you can imagine, for the ECB. “
Political unrest in Rome has raised concerns about how rising interest rates will affect the sustainability of Italy’s rising public debt, which is higher than most eurozone countries at 150 percent of the gross domestic product.
Officials in more frugal countries, such as Germany and the Netherlands, are concerned that the ECB’s new bond-buying tool will encourage fiscal nonsense among member states and divert to “monetary financing” of governments: the printing of money by a central bank to prop up a country’s funding. budget, which goes against the EU treaty.
But the ECB believes its new instrument is justified because it will ensure that its monetary policy is transmitted uniformly across the bloc. He said: “By safeguarding the transmission mechanism, the ICC will allow the governing council to fulfill its price stability mandate more effectively.”
The 50 basis point increase in the ECB’s main policy types went beyond its orientation last month which sought to start raising rates by 25 basis points and exceeded the expectations of most economists despite leaks. ‘this week I considered a bigger move.
Central banks are often reluctant to break their orientation, as this runs the risk of eroding their credibility. But the ECB has come under intense pressure from critics who accuse it of lagging behind in the fight against inflation in the eurozone, which reached an all-time high of 8.6 percent a year until June.
The ECB has no experience in raising rates. The last time he did so in 2011, under then-President Jean-Claude Trichet, he was forced to reverse the move a few months later, as the eurozone was hit by a debt crisis. sovereign. The only current member of its 25-member governing council who was there at the time of his last rate hike was Klaas Knot, who had taken over from the Dutch central bank seven days earlier.
The ECB has been slower than most central banks in responding to rising inflation and is lagging behind the US Federal Reserve, which is expected to raise rates by at least 75 basis points next week, as well as a similar move last month.