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European Central Bank increases interest rates for the first time in over 10 years

The European Central Bank has decided to raise three interest rates by 50 basis points. While the decision doesn’t come as a surprise, many were shocked by the seemingly rapid spike in the rate, noting that a 25 basis point increase was anticipated. The interest rate hike is the Frankfurt-based Bank’s first increase in 11 years. 

Effective on July 27, ECB’s primary refinancing operation rate will be bumped up to 0.5%, while the marginal lending facility will go to 0.75%, and the deposit facility will be 0.00%.

ECB President, Christine Lagarde, credited the larger-than-expected increase to high rates of inflation which do not appear to drastically improve by the end of the year. She cited the war in Ukraine as another vital issue that continues to stunt growth in Europe as the EU remains heavily reliant on Russia’s fossil fuels. 

The Euro dropped to equivalence with the U.S dollar last week, which Lagarde described as another issue. During the European Central Bank’s press conference, Lagarde said, “These factors are significantly clouding the outlook for the second half of 2022 and beyond.”

Experts are now questioning forward guidance, which occurs when central banks detail their plans and expectations from the ECB and other major central banks. Deutsche Bank’s Jim Reid added, “Forward guidance pretty much everywhere is dead.” 

Lagarde tried making the people think about the longevity of the Bank’s plan by adding, “We are much more flexible in that we are not offering forward guidance of any kind. The ECB will continue to react and make decisions accordingly based on data which they ultimately did today with the rate increase. The ultimate destination of our policy path remains the same: progressively raising interest rates to a broadly neutral setting.”

The European Central Bank also announced that they have approved the Transmission Protection Instrument (TPI) in today’s TPI press release. “The Governing Council assessed that establishing the TPI is necessary to support the effective transmission of monetary policy. In particular, as the Governing Council continues normalizing monetary policy, the TPI will ensure that the monetary policy stance is transmitted smoothly across all euro area countries, said the ECB.”



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