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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 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 by 50 basis points 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.
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 Thursday, the ECB signaled further rate increases 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 normalization, 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.”
“Today’s decision shows that the ECB is more concerned about this credibility than about being predictable,” said Carsten Brzeski, global head of macro at ING, in a note. “This matters more than forward guidance.”
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.”
Taken together, the ECB’s actions point to a potentially “treacherous” stretch ahead for policy makers, said Andrew Kenningham, chief Europe economist at Capital Economics, in a note.
“We think this will be the first of a series of hikes by which the ECB will raise the deposit rate to around 2% next year –– and we also think the Bank will ultimately have to use its new asset purchase program to avert another eurozone crisis,” he wrote.
Details of the antifragmentation tool were released after ECB President Christine Lagarde’s news conference, though she warned that some elements remained at the discretion of the ECB council.
The outline provided by the ECB showed criteria that include that the applicant comply with the EU fiscal framework and not be subject to an excessive deficit procedure, be absent “severe macroeconomic imbalances,” and have sustainable debt as judged by European Commission, the European Stability Mechanism, the International Monetary Fund and other institutions, together with the ECB’s internal analysis.
The ECB said, if activated, it would not cause a “persistent” impact on the balance sheet, and would focus on public securities with a maturity between 1 and 10 years, though private-sector securities purchases would be considered.
At the press conference, ECB President Christine Lagarde said there were certain elements that were not disclosed and that there was an element of discretion left for the ECB governing council.
The euro
EURUSD,
+0.05%
saw choppy price action following the meeting and Lagarde’s news conference, but was flat on the day in afternoon trading near $1.0182. The yield on the 2-year German bund
TMBMKDE-02Y,
0.652%
rose 2.8 basis points to 0.642% after previously shooting up by 15 basis points. European stocks
SX5E,
+0.31%
ended the day up modestly, with the Euro Stoxx 50 rising 0.3%.
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