FRANKFURT (Reuters) – The European Central Bank (ECB) on Thursday raised interest rates for the first time in 11 years to rein in record inflation, following in the footsteps of dozens of central banks even as the economy of the euro zone is suffering the consequences of the war in Ukraine.
The ECB ended the era of negative rates by raising its deposit rate by 50 basis points, bringing it back to zero, despite announcing after its June meeting that it would rate hike of only 25 basis points.
The interest rate of the main refinancing operations as well as that of the marginal lending facility are also raised by half a point, to 0.5% and 0.75% respectively.
“Further normalization of interest rates will be appropriate,” the ECB said in a statement, adding that the exit from negative rates “allows the Governing Council to make a transition to a meeting-by-meeting approach to rates.”
Sources close to the Governing Council debates told Reuters on Tuesday that a half-point rate hike was being considered amid the worsening inflation outlook suggested by recent indicators.
Inflation, already close to double digits, now risks anchoring itself beyond the 2% target set by the ECB and a shortage of gas this winter is likely to push prices even higher.
The ECB has also agreed to provide further assistance to the most indebted countries in the Union by approving a new securities purchase program (Transmission Protection Mechanism, TPM), intended to limit the increase in their borrowing costs and limit financial fragmentation.
“The scale of purchases under the TPI depends on the severity of the risks facing the transmission of monetary policy,” the bank said. “The TPI will ensure that the monetary policy stance is transmitted smoothly across all eurozone countries.”
This commitment comes as Italy faces a political crisis following the resignation of Council President Mario Draghi.
Closely watched, the yield spread between the ten-year Italian and the German Bund of the same maturity widened to 247.70 basis points, a level it had not reached since mid-June.
(Report Balazs Koranyi and Francesco Canepa, French version Laetitia Volga, edited by Sophie Louet)