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The European Central Bank (ECB) decided on Thursday to raise its interest rates for the first time in more than ten years in the face of galloping inflation, activated to hit hard with a higher than expected increase despite the crisis Italian politics.
It is a change of course for the main monetary institution of the European Union: Thursday, July 21, the European Central Bank decided to increase its interest rate, a decision which had not been dared since 2011. His goal ? Stemming excessively high inflation, without hesitating to take strong action: the rise in interest rates is even higher than expected, despite the Italian political crisis.
The “daring choice”
Taken in a complex trade-off between rising prices and fears for growth, the Frankfurt institution chose boldness: it raised its three key rates by 50 basis points after having prepared people’s minds for an increase of only 25 points.
The main interest rate thus goes from zero, the level where it has been camped since 2016, to 0.50%, while that taxing part of the bank liquidities not distributed in credit, goes up from -0.50% to zero.
The decision on this turn of the screw was “unanimous” in the face of inflation which “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 refers to the era of debt ratios generated in 2014 and closes a decade of generous monetary policy which has helped the economy to overcome the crises of recent years.
A clouded European economic horizon
This tightening of monetary policy in the euro zone had already begun in July, with the end of new debt purchases on the markets.
The other central banks have been much more active for months against soaring prices, such as the American Fed which took off its rates in March.
But the ECB’s task is more complex due to the growing threats of cuts in Russian gas supplies, the risk encouraged by the political crisis in Italy and the fall of the euro.
“The economic horizon is darkening”, a summary by Christine Lagarde on Thursday, the outlook is deteriorating “for the second half of 2022 and beyond”. In Italy – one of the most vulnerable economies in the monetary zone – the Prime Minister and appointed head of the ECB by Christine Lagarde, Mario Draghi, submitted his resignation to the president on Thursday.
His departure, which could lead to early elections this fall, immediately boosted the Italian borrowing rate on the market. The spread with the German rate has reached its highest since 2020 and the pandemic.
To ward off the specter of a new sovereign debt crisis, the European Central Bank announced on Thursday a new instrument to protect the most fragile states against speculative attacks, accentuating this gap, “or propagated”, in an unjustified way.
The ECB argues that these “spreads” hinder the proper transmission of its monetary policy. But strict conditions of use must be defined, the guardians of the euro not having the right to help governments budget.
“The Governing Council will determine the eligibility” of a country for this new tool and “the ECB does not take a position on internal political questions”, assured Christine Lagarde without naming Italy despite several questions on the subject. But “if we have to use it, we will not hesitate”, assured the Frenchwoman, hammering that the ECB “is capable of doing things big”.
In the euro zone, the gas crisis also complicates the task of the ECB. The Nord Stream gas pipeline from Russia to Germany certainly restarted on Thursday after ten days of maintenance, but it is still not operating at full capacity, deliveries having been drastically reduced since mid-June.
A complete stoppage of gas deliveries by Moscow would plunge the euro zone into recession and a too rapid rise in rates would worsen the situation.
“We are very attentive” to energy and “in particular to gas” because of its impact on electricity prices and inflation, said Christine Lagarde.
A glimmer of hope in the European night, however: the community economy continues, according to the ECB, to “benefit” from the lifting of health restrictions and the resumption of activity, particularly in the tourism sector.