ECB raises rates for first time in over a decade

The European Central Bank has raised interest rates by half a percentage point — its first increase for more than a decade — while pledging to prevent rising borrowing costs from sparking a eurozone debt crisis amid political turmoil in Italy.

The ECB said in a press release after its governing council met in Frankfurt that it “judged that it is appropriate to take a larger first step on its policy rate normalization path than signaled at its previous meeting” because of higher than expected inflation and the support of its new bond-buying scheme.

Its governing council said it would “safeguard the smooth transmission of its monetary policy stance” under a new program set up to tackle any increase in the bond yields of individual countries beyond the level justified by economic fundamentals.

It said more details of the new “transmission protection instrument” would come in a separate announcement at 14:45 Frankfurt time.

The central bank’s deposit rate will rise from minus 0.5 per cent to zero, while the rate on its main refinancing operations will rise from zero to 0.5 per cent and its marginal lending facility will increase from 0.25 per cent to 0.75 per cent.

The central bank said rates would rise further in future meetings, adding: “The frontloading today of the exit from negative interest rates allows the governing council to make a transition to a meeting-by-meeting approach to interest rate decisions.”

The moves begin to reverse a decade of ultra-easy monetary policy at the ECB, which has maintained a negative deposit rate and bought almost €5tn of bonds to support the economy over the past eight years, but is now tightening policy to tackle record Eurozone inflation of 8.6 percent.

There are growing fears that higher interest rates will tip the eurozone into recession. The bloc has already been hit by soaring energy and food prices following Russia’s invasion of Ukraine, a slowdown in business activity and a drop in consumer confidence to record lows.

The ECB decision came hours later Mario Draghi resigned as Italy’s prime minister on Thursday. His planned exit is expected to trigger early elections this year.

Krishna Guha, head of policy and central bank strategy at US investment bank Evercore, said: “The combination of a brewing giant stagflationary shock from weaponised Russian natural gas and a political crisis in Italy is about as close to a perfect storm as can be imagined for the ECB.”