ECB surprises with historic 50 basis point rate hike to control inflation

The European Central Bank raised interest rates for the first time in nearly eleven years. Moreover, this movement is historic for two reasons: the rise was 50 basis points all at once, something that has not been seen for 22 years. The other reason is that the Eurozone is officially moving away from negative interest rates for the first time since 2014. High inflation and aggressive monetary tightening in other jurisdictions forced the ECB to break its roadmap not to be outdone and keep the euro afloat.

In addition, the central bank raised the three key rates at once: deposit facility (where banks store their cash), primary refinancing type (where banks participate in weekly auctions), and marginal facility (where banks call for emergency cash). The ECB also announced the launch of the anti-fragmentation tool to prevent the spreads of soaring debt, that is to say that the risk premia of Spain and Italy are reaching “unacceptable” levels.

Accordingly, the Board of Governors decided to raise the interest rate on the main financing operations and the interest rates on the marginal credit facility and deposit facility will change to 0.50%, 0.75% and 0.00% respectively effective July 27, 2022.

A historic rise of the ECB

There were only two occasions when the rate increase was equal to or greater than 50 basis points. The first was on January 4, 1999, at its third meeting, when it suddenly raised rates by 75 basis points to 2.75%, in the first month of the euro’s entry into the financial markets, and the second dates from June 9, 2000when the ECB raised rates by 50 basis points to 3.25%.

The truth is that the European Central Bank has fallen behind in the race to raise interest rates. This tepidness caused (along with other factors) a sharp drop in the euro and even a loss of parity with the dollar. This depreciation of the single currency further accentuates the rise in prices in the euro zone. Now the ECB is trying to regain some of the lost ground, but it won’t be an easy task, as other central banks like the Fed or the Bank of England have been raising interest rates for months.

Mabrouk Chetouane, director of global markets strategy at Natixis IM Solutions, believes that the European Central Bank has come too late in the fight against inflation, now the only way to clip the wings of rising prices is to generate a crisis. .

“In my opinion, the only way to significantly curb inflation is to cause a recession”, explains Chetouane, who warns: “It is the only way to achieve this objective”, while recalling that “the so-called soft landing doesn’t really exist; it’s very complicated for a central bank to generate”.

The Natixis IM Solutions expert states that “The ECB has recognized that it made a mistake, just like the Fed, in ignoring the true nature of inflation, and now with the pressure mounting, there is no no alternative but to raise interest rates aggressively. a new world compared to the one we have been living in since 2008. What matters is not so much the level of interest rates, but the speed of their rise”, adds Chetouane.


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