The European Central Bank raised its key interest rates by half a percentage point on Thursday, the first increase in more than a decade and a bigger-than-expected jump, as it stepped up its fight against record high inflation.
Consumer prices in countries that use the euro rose at their fastest pace in generations, reaching 8.6 percent in June from a year earlier, led by rising energy and food prices.
The bank previously telegraphed that it intended to raise rates by only a quarter of a point.
But on Thursday the bank’s Governing Council said it “considers it appropriate to take a larger first step towards normalizing interest rates than was signaled at its previous meeting”. This is due to an “updated assessment of inflation risks” and the approval of a new one a policy instrument designed to ensure the effective transmission of monetary policy.
Almost every corner of the globe has been affected by inflation in recent months, but the situation facing Christine Lagarde, the bank’s president, is particularly difficult: balancing the weaknesses and debt burdens of the economies of 19 different countries.
The interest rate hike was the crucial next step at the end of the European Central Bank’s era of ultra-loose monetary policy support. The bank has already ended its multi-trillion euro bond-buying programs. And after eight years, her policy of negative interest rates – intended to encourage banks to lend generously – came to an abrupt end. The deposit rate, which banks receive for depositing money with the central bank overnight, was raised from minus 0.5 percent to zero.
The bank said a further rate hike would be appropriate at upcoming meetings, but the decision to move to a bigger-than-expected rate hike – to “front-load” the exit from negative rates – means future decisions will be made at each meeting depending on the data. The bank has a target of 2% inflation in the medium term.
Policymakers are walking a fine line between easing price pressures and sending the European economy into recession.
The last time the bank raised interest rates was in July 2011, but policymakers reversed course just four months later as the crisis in the region’s bond markets intensified.