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 jump than expected, as it ramped up its fight against record high inflation.
Consumer prices in the countries that use the euro are soaring at their fastest rate in generations, reaching 8.6 percent in June from a year earlier, driven by rising energy and food prices.
Previously, the bank had telegraphed that it intended to raise rates by only a quarter-point.
But on Thursday the bank’s Governing Council said 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.” This was because of an “updated assessment of inflation risks” and the approval of a new policy tool designed to ensure the effective transmission of monetary policy.
Nearly every corner of the globe has been hit by inflation in recent months, but the situation facing Christine Lagarde, the bank’s president, is particularly tricky: balancing the weaknesses and debt burdens of 19 different countries’ economies.
Raising interest rates was the crucial next step in ending the European Central Bank’s era of ultra-loose monetary policy support. The bank has already ended its multitrillion-euro programs to buy bonds. And after eight years, the end of its policy of negative interest rates — aimed at prompting banks to lend generously — abruptly ended. The deposit rate, which is what banks receive for depositing money with the central bank overnight, was raised from minus 0.5 percent to zero.
The bank said that further interest rate increases would be appropriate at upcoming meetings but the decision to go with a larger-than-expected rate increase — to “frontload” the exit from negative interest rates — meant that future decisions will be made at each meeting depending on data. The bank has a target of 2 percent inflation over the medium term.
Policymakers are walking a fine line between easing price pressures and drawing the European economy into a recession.
The last time the bank raised rates was in July 2011 but policymakers reversed the move just four months later, as a crisis in the region’s bond markets intensified.
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