Eurozone to get its first interest rate hike in 11 years next month

The European Central Bank (ECB) has confirmed it will raise interest rates in a bid to bring down soaring prices across the eurozone.

The hike will be of 0.25 percentage points, in line with what most analysts had expected, and will take place in July, the ECB said in a statement.

Another hike will happen in September.

The announcement marks the first increase in interest rates in over a decade and closes a long chapter of loose monetary policy.

For months, ECB President Christine Lagarde had used the word “temporary” to describe rising inflation. But after Russia launched its invasion of Ukraine, economic forecasts were turned upside down and the trend further exacerbated. 

Pushed by the war, a persistent power crunch and fresh supply chain disruption, inflation in the eurozone hit a record-breaking 8.1% in May, four times the 2% annual target desired by the central bank.

Consumers and companies are now faced with unpredictable prices, putting policy-makers under pressure to deliver tangible solutions, even if there’s little they can do in the short term to make a difference.

Inflation is haunting other developed economies, whose banks have already signalled their intention to bump interest rates before stagflation takes hold.

The move will directly change the deposit facility rate, which sets the interest that other banks receive for depositing money with the ECB overnight.

The rate was downgraded to 0.00 in July 2012, at the peak of the sovereign debt crisis, and was later cut down four more times, descending all the way to -0.50 in September 2019.

Thursday’s announcement means the rate will go up to -0.25 in July.

The interest rate on the main refinancing operations will see an increase of a similar size.

In another sign of times, the ECB announced the end of its asset purchase programme (APP), an unconventional measure that was also introduced during the debt crisis to ensure price stability.

Under the programme, the ECB buys government and corporate bonds and other asset-backed securities, worth between €15 billion to €80 billion per month.

By ending the APP in June and hiking rates in July, the ECB’s main goal is to make borrowing more expensive for consumers and businesses in order to curtail demand and stimulate a gradual reduction in prices.

A rise in interest rates also ensures that those who lend money now don’t lose value when they are paid back in the future.

However, the measure could affect indebted countries, like Italy, Greece and Spain, who have for years relied on the ECB’s negative rate policy to obtain liquidity more easily and finance their debts.

Thursday’s announcement was largely anticipated by markets and investors, who had spent the last weeks speculating how far Lagarde would be willing to go. At the end, she opted for a careful 0.25 rise rather than a sudden 0.50 bump, like a few member states had suggested.