The European Central Bank raised interest rates for the first time in 11 years

First modification: 07/22/2022 – 04:39

The European Central Bank, ECB, decided to raise its interest rates by 50 basis points or 0.5 percentage points, the first rise in 11 years, while approving a new unlimited instrument that allows it to curb the risk premiums of some countries buying their sovereign debt.

The ECB seeks to contain inflation in the Eurozone, which shot up to 8.6% in June, and for this it needs to raise interest rates. However, even before the price of money began to rise, the risk premiums of the most indebted countries were already skyrocketing.

At a delicate moment, for example, for Italy, which is going through a new political crisis, new elections and for which the disbursement of European ‘Next Generation’ funds could be in danger.

The announced instrument, which is called the Transmission Protection Instrument, TPI, gives the ECB more peace of mind to raise interest rates quickly to curb inflation, but without the risk of the risk premiums of developing countries skyrocketing. the periphery.

The ECB’s hike of half a percentage point for the 19 countries that use the euro currency is expected to be followed by another hike in September, possibly by another half point. The president of the ECB, Christine Lagarde, assured from Frankfurt that the decision to approve this instrument that curbs unjustified spreads was approved unanimously.

According to her, the largest increase was unanimous, since “inflation remains undesirably high and is expected to remain above our target for some time.” “Economic activity is slowing down. Russia’s unwarranted aggression toward Ukraine is a continuing drag on growth,” she commented.

Recession forecasts increase in the Eurozone countries

But the ECB is a bit late in its rate hike, a sign that inflation turned out to be higher and more persistent than initially expected, and the more unstable state of an economy exposed to the Ukraine war and dependency. of Russian oil and natural gas.

For the end of the year and the next recession forecasts increased due to the rise in electricity, fuel and gas bills, which represent a blow to companies and the purchasing power of citizens.

Raising interest rates is considered a common cure for inflation. The ECB’s benchmark indices affect what it costs banks to borrow and thus help determine what they charge to lend. By putting a damper on borrowing, rate hikes can slow economic growth, posing a major dilemma for the ECB and the US Federal Reserve.

“The most precious good that we can offer and that we have to offer is price stability. So we have to reduce inflation to 2% in the medium term. That is the imperative,” Lagarde said. “And it’s time to fulfill it,” she concluded.

With EFE and AP