ECB raises interest rates for the first time in 11 years... Unanimous surprise 'Big Step' hike

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The European Central Bank (ECB) took a surprise big step (a 0.5 percentage point rate hike) on the 21st (local time) to curb soaring inflation by raising the benchmark interest rate from 0% to 0.5%. This is the first time in 11 years since July 2011 that the ECB has raised interest rates.

At the monetary policy meeting held in Frankfurt, Germany, the ECB raised the policy rate from the existing 0% to 0.5%. This is twice the size of the 0.25 percentage point increase initially forecasted by the ECB and expected by the market.

In a statement, the ECB said, "It was deemed appropriate to take a bigger first step than indicated at the previous meeting on the path to rate normalization." Additionally, the ECB raised the deposit rate and marginal lending rate by 0.50 percentage points to 0% and 0.75%, respectively.

ECB President Christine Lagarde said at a press conference immediately afterward, "The 0.5 percentage point increase was decided unanimously," explaining, "This is because inflation remains undesirably high and is expected to stay above the target for some time."

She mentioned recent economic slowdown, the impact of Russia's invasion of Ukraine, soaring inflation, and supply chain disruptions, evaluating that "the outlook for the second half of the year and beyond is bleak." However, regarding spreading recession concerns, she drew a line by saying, "A recession is not expected this year or next year."

With this decision, the era of zero benchmark interest rates that has continued for over six years since March 2016 in the Eurozone (19 countries using the euro) has come to an end. The marginal lending rate also moved out of negative territory.

This surprise big step is largely due to the impact of soaring inflation. Last month, the Eurozone's Consumer Price Index (CPI) jumped 8.6% compared to a year ago, marking the highest level since related statistics began in 1997.

At the monetary policy meeting, the ECB also approved the introduction of a new bond purchase program called the TPI (Transmission Protection Instrument). This is intended to cap the rising trend of government bond yields within the Eurozone. During President Lagarde's press conference, the yield spread between the 10-year German government bond, considered a safe asset, and the 10-year Italian government bond widened to 246.5 basis points (1 bp = 0.01 percentage point).

This content was produced with the assistance of AI translation services.