The European Central Bank on Thursday raised key interest rates for the first time in over a decade with the purpose of combating inflation, reflected in consumer prices of the Euro-zone which reached 8,6% in the first half of the year.
In a surprise announcement ECB raised its negative benchmark deposit rate by 50 basis points from minus 0.5% to 0%, lifting the bank's deposit facility out of negative territory for the first time in eight years.
ECB justified the bigger hike by an updated assessment of inflation risks and pledged further action possibly as soon as its next meeting in September. At our upcoming meetings, further normalization of interest rates will be appropriate, said ECB chief Christine Lagarde.
Moving away from negative interest rates allows us to make a transition to a meeting-by-meeting approach to our interest rate decisions, Lagarde added.
ECB targets an inflation rate of 2% as its maximum, but had been keeping its interest rates to historic lows for years. However the Euro zone has been battered by several national debt crises, the COVID pandemic, and now, Russia's invasion of Ukraine and the prospects of not having sufficient natural gas next winter.
US Federal Reserve and the Bank of England have already taken action to curb inflation, raising interest rates earlier than the ECB. The Euro has also plunged to a record low against the US dollar, further complicating the inflation scenario.
Raising interest rates could help bring down inflation, but higher borrowing costs could also spell trouble for heavily indebted countries like Italy or Spain. To address this, the ECB also unveiled a tool to correct stress in bond markets for indebted Euro zone members.
The ”Transmission Protection Instrument (TPI), which is a targeted bond-buying scheme 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 ECB said.