The ECB, bolder than expected, ends the era of negative rates

The European Central Bank (ECB) decided on Thursday to raise interest rates for the first time in more than a decade, surprising with a higher than expected rise to combat inflation and despite the political crisis in Italy.

Caught in a complex dilemma between rising prices and recession fears, the Frankfurt institution opted for boldness: it raised its three key rates by 50 basis points after preparing people’s minds for a hike of just 25 basis points. points.

The main interest rate thus goes from zero, the level at which it has camped since 2016, to 0.50%, while the one that taxes part of the bank liquidity not distributed in credit rises from -0.50% to zero.

The decision on this turn of the screw was “unanimous” in the face of inflation that “will remain at an undesirable high level for some time,” according to the president of the institution, Christine Lagarde.

The rise in prices in the euro zone -8.6% in June- continues to increase under the combined effect of the post-Covid recovery, tensions in supply chains and the energy crisis linked to the Russian offensive in Ukraine.

The ECB thus closes the era of negative interest rates that began in 2014 and closes a decade of generous monetary policy that has energized the economy during the crises of recent years.

After this strong boost, the ECB “will continue with the normalization of rates” and this “meeting by meeting,” Lagarde assured.

The next monetary meeting is scheduled for September with new economic forecasts.

“Eurozone inflation for the rest of the year will remain high and the pressure on the ECB to act will also be high in the short term,” said Konstantin Veit, portfolio manager at Pimco.

This “historic” decision reflects the fear of the guardians of the euro that the window of opportunity for a rate hike will close, analyzes Carsten Brzeski, of the ING bank.

– complex task –

This tightening of monetary policy in the euro zone had already begun in July with the end of purchases of new debt in the markets.

The rest of the central banks have been much more active for months in the face of price increases, such as the US Fed which lowered rates in March.

But the ECB’s task is made more complex by the growing threat of cuts in Russian gas supply, the risk posed by the political crisis in Italy and the fall of the euro.

“The economic horizon is darkening” and this “for the second half of 2022 and beyond”, Ms. Lagarde summed up.

In Italy -one of the most vulnerable economies in the monetary area-, the prime minister and predecessor of Mrs. Lagarde at the head of the ECB, Mario Draghi, presented his resignation on Thursday. Early elections will be organized.

His departure immediately boosted the interest rate on Italian loans in the market.

The spread with the German rate reached its highest level since mid-June 2022 (good 2022).

– Tool against speculation –

To avert the specter of a new sovereign debt crisis, the European Central Bank also announced on Thursday a new instrument to protect the most fragile states from speculative attacks that increase their borrowing costs.

The ECB considers that these “spreads” -difference with the type of the German loan without risk- hinder the adequate transmission of its monetary policy.

Strict conditions have been defined for the use of this tool, known as the “transmission protection instrument” (IPT), as the guardians of the euro can be accused of carrying out covert state financing.

Lagarde dodged repeated questions about whether Italy could be the first country to benefit from the ECB’s umbrella.

The institute “does not take a position on domestic policy issues,” said the former IMF chief.

But if necessary, the ECB “will not hesitate” to use the IPT because it is “capable of doing things in a big way”, he remarked.