0.5% instead of 0.25%. ECB interest rates rise twice as fast as expected

The main interest rate of the European Central Bank (ECB), the so-called refinancing rate, which has been at 0% since 2011, will rise to 0.5% and not to 0.25%, as bankers have repeatedly indicated. In recent weeks, the ECB announced this on Thursday.

The deposit rate, which was negative and stood at -0.5%, will become 0%, meaning commercial banks will no longer pay to park money at the ECB.

With inflation rising in the eurozone (from 8.1% in May to 8.6% in June), the ECB says it is taking more muscular measures to halt the sharp price hike.

“The interest rate applicable to the main refinancing operations and the interest rates applicable to the marginal lending facility and the deposit facility will be increased to 0.5%, 0.75% and 0.0% respectively, effective July 27, 2022” , according to the Frankfurt-based institution.

protective shield

In addition to the sharper rise in interest rates, the ECB says it has approved a special protective shield for countries and banking systems most exposed to debt, such as Italy, Portugal, Greece or Spain.

In any case, the ECB explains that the new shield will take the form of a new debt and asset purchase program.

“The IPT will complement the Governing Council’s toolkit and can be activated to counter disorderly, unwarranted market dynamics that could pose a serious threat to the transmission of monetary policy in the euro area.”

“The volume of asset acquisitions under the IPT depends on the severity of the risks to the transmission of monetary policy. Acquisitions are not subject to prior restrictions,” explains the ECB. So apparently there are no conditions attached to it, as some media said. Details of the operation will be announced later this afternoon.

Rates are all going up

“The Governing Council has decided to continue with a 50 basis point increase” [0,5 pontos percentuais] of the three key ECB interest rates and approved the Transmission Protection Instrument (IPT),” reads an official note.

Frankfurt “thought it appropriate to take a larger first step on the path of normalization of key interest rates than indicated at the previous meeting”.

“This decision is based on the updated assessment of inflation risks and on the strengthened support of the IPT for the effective transmission of monetary policy”. The ECB also mentions that further rate hikes are to be expected from now on, as other central banks, such as the US Federal Reserve, are doing.

“A new normalization of interest rates will be appropriate at the next ECB meetings”. The next one is in September. There was talk of a further 0.5 percentage point increase, but taking into account the tightened inflation environment, it is likely to be much more.

It should be recalled that at the June rate meeting just over a month ago, Christine Lagarde, the ECB’s president, announced the end of all asset purchase programs and the start of the effective rate hike.

“The net purchases of our various programs will end” and “in July [dia 21] We plan to increase our benchmark rates for the first time in 11 years.”

After that, Lagarde also warned that “we will continue this path of normalization – and we will go as far as necessary to ensure inflation stabilizes at our medium-term target of 2%”.

in update