# ECB hikes rates, throws lifeline to indebted countries
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-07-21
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: ECB Surprises Markets with 50 Basis Point Rate Hike
Meta Description: The ECB raises interest rates more than expected as concerns about inflation outweigh growth worries amid impact of Russia's war in Ukraine.
URL: https://financedigest.com/ecb-hikes-rates-throws-lifeline-to-indebted-countrieshtml

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By Balazs Koranyi and Francesco Canepa

FRANKFURT (Reuters) -The European Central Bank raised interest rates by more than expected on Thursday as concerns about runaway inflation trumped worries about growth, even while the euro zone economy is suffering from the impact of Russia’s war in Ukraine.

The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. It was the [ECB’s first rate](https://www.financedigest.com/fed-rates-up-boe-up-ecb-up-stocks-up.html "Fed rates up, BoE up, ECB up, stocks up") increase in 11 years.

Policymakers also [agreed to provide extra help for the euro zone’s big debtor](https://www.financedigest.com/sovereign-debtors-creditors-agree-on-steps-to-jumpstart-debt-restructurings.html "Sovereign debtors, creditors agree on steps to jumpstart debt restructurings") nations – Italy among them – with a new bond purchase scheme. [Sources told Reuters they did not expect to use it imminently despite a selloff in Italian](https://www.financedigest.com/exclusive-ardian-explores-taking-italian-tower-operator-inwit-private-sources.html "Exclusive-Ardian explores taking Italian tower operator INWIT private-sources") bonds.

Ending an eight-year experiment with negative interest rates, the ECB also [lifted its main refinancing rate](https://www.financedigest.com/shares-steady-dollar-dips-as-us-holiday-lifts-rates-gloom.html "Shares steady, dollar dips as US holiday lifts rates gloom") to 0.50%, and promised another hike, possibly as soon as its Sept. 8 meeting, with more to follow later.

ECB President Christine Lagarde said a clear deterioration of the inflation outlook and unanimous [backing for the anti-fragmentation instrument justified the bigger move](https://www.financedigest.com/analysis-at-world-cup-saudi-crown-prince-moves-back-on-to-global-stage.html "Analysis-At World Cup, Saudi crown prince moves back on to global stage").

Price pressure is [spreading across](https://www.financedigest.com/germany-u-s-agree-to-new-covid-curbs-as-omicron-spreads-across-globe.html "Germany, U.S. agree to new COVID curbs as Omicron spreads across globe") more and more sectors,” Lagarde said. We expect [inflation to remain undesirably high for some time.” She listed driving factors including higher food and energy costs and wage rises](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February").

We decided on balance that it was appropriate to take a larger step [towards exiting from negative interest rates.”](https://www.financedigest.com/boe-raises-rates-again-as-investors-look-towards-end-of-hikes.html "BoE raises rates again as investors look towards end of hikes")

But even if the ECB is now moving more quickly, Lagarde said the terminal [rate – or level where hikes](https://www.financedigest.com/wall-street-slips-dollar-gains-as-fed-seen-hiking-rates-in-may.html "Wall Street slips, dollar gains as Fed seen hiking rates in May") end – has not changed.

The ECB did not provide guidance for its expected [rate hike](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike") in September, saying only that further increases will be as appropriate and decisions will be made meeting-by-meeting.

The [ECB had for weeks guided markets to expect](https://www.financedigest.com/hawkish-ecb-comments-push-up-rate-hike-expectations.html "Hawkish ECB comments push up rate-hike expectations") a 25 basis point increase on Thursday, but sources close to the discussion told Reuters early this week that 50 basis points had come into play as part of a deal including help for indebted countries.

With inflation across the 19 countries that use the euro already approaching double-digit territory, it is at [risk of getting entrenched well above the ECB’s 2% target](https://www.financedigest.com/britains-tax-take-risks-blowing-green-energy-off-target.html "Britain’s tax take risks blowing green energy off target"). Any gas shortage over the coming winter is likely to [push prices even higher](https://www.financedigest.com/powells-warning-on-higher-u-s-rates-pushes-dollar-to-3-mth-high.html "Powell’s warning on higher U.S. rates pushes dollar to 3-mth high"), perpetuating rapid price growth.

Lagarde warned that [risks to the inflation](https://www.financedigest.com/high-inflation-recession-risk-widen-ecb-dilemma.html "High inflation, recession risk widen ECB dilemma") outlook were on the upside and have intensified, particularly as the war is likely to drag on, keeping energy prices high for longer.

Economists polled by Reuters had predicted a 25 basis point increase but most favoured a 50 basis point hike, lifting the [ECB’s record-low minus 0.5% deposit rate](https://www.financedigest.com/morgan-stanley-others-now-forecast-4-peak-for-key-ecb-rate.html "Morgan Stanley, others now forecast 4% peak for key ECB rate") to zero.

The [euro climbed](https://www.financedigest.com/u-s-dollar-falls-as-euro-climbs-in-risky-fx-rout.html "U.S. dollar falls as euro climbs in risky FX rout") as much as 0.8% to $1.0261, having traded at $1.0198 just before the statement but turned negative on the day as Lagarde spoke.

The euro climbed to as high as $1.0278 after the rate [hike before easing back](https://www.financedigest.com/uks-bellway-to-buy-back-shares-hike-social-housing-output.html "UK’s Bellway to buy back shares, hike social housing output") to $1.0183, flat on the day. Markets are now pricing in a 50 basis point [rate hike](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike") in September and see a combined 127 basis points of rises over the rest of the year.

GOING BIG?

The new bond purchase scheme, called the Transmission Protection Instrument (TPI), is intended to stop any excessive [rise in borrowing costs](https://www.financedigest.com/suedzucker-quarterly-profits-surge-73-5-despite-cost-rise.html "Suedzucker quarterly profits surge 73.5% despite cost rise") for governments across the currency bloc as policy tightens.

Recent increases have been larger for indebted countries like Italy, Spain and Portugal but sources told Reuters the ECB was not seeing the [need to activate the new scheme in any country](https://www.financedigest.com/5-countries-you-need-to-have-an-offshore-account-in.html "5 Countries You Need To Have An Offshore Account In") at present.

Activating the instrument will be entirely at the discretion of the [ECB and the bank will target public sector bonds](https://www.financedigest.com/ecb-can-cut-carbon-footprint-by-shedding-bonds-of-biggest-polluters.html "ECB can cut carbon footprint by shedding bonds of biggest polluters") with maturities between one and 10 years.

The [ECB is capable of going big](https://www.financedigest.com/big-fall-in-euro-zone-inflation-offers-little-help-for-ecb.html "Big fall in euro zone inflation offers little help for ECB") for that,” Lagarde said.

Countries will be eligible if they comply with [European Union fiscal rules](https://www.financedigest.com/ftx-collapse-shows-urgent-need-to-finalise-eu-crypto-rules-says-european-commission.html "FTX collapse shows urgent need to finalise EU crypto rules, says European Commission") and do not face “severe macroeconomic imbalances. [Compliance with commitments under the EU’s Recovery and Resilience Facility will be needed](https://www.financedigest.com/why-leading-financial-institutions-are-relying-on-video-to-meet-compliance-needs.html "Why leading financial institutions are relying on video to meet compliance needs"), as will an assessment of debt sustainability.

All [euro zone](https://www.financedigest.com/euro-zone-inflation-seen-just-above-ecbs-target-in-2025-poll-shows.html "Euro zone inflation seen just above ECB’s target in 2025, poll shows") countries currently comply with those conditions, sources told Reuters.

The ECB’s commitment on Thursday comes as a [political crisis in Italy is weighing on markets](https://www.financedigest.com/the-political-wildcard-what-is-trumps-us-presidential-nomination-doing-to-financial-markets.html "The political wildcard: What is Trump’s US presidential nomination doing to financial markets?") following the resignation of Prime Minister Mario Draghi, who was Lagarde’s predecessor at the ECB.

The yield spread between Italian and German 10-year bonds widened during Lagarde’s news conference to near the 250 basis point level that triggered an emergency [ECB policy meeting](https://www.financedigest.com/sterling-steadies-vs-dollar-ahead-of-boe-ecb-meetings.html "Sterling steadies vs dollar ahead of BoE, ECB meetings") last month.

The [ECB’s 50 basis point hike](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") still leaves it lagging its global peers, particularly the U.S. Federal Reserve, which lifted rates by 75 [basis points](https://www.financedigest.com/traders-ramp-up-bets-on-75-basis-point-ecb-sept-hike-bond-yields-jump.html "Traders ramp up bets on 75 basis-point ECB Sept hike, bond yields jump") last month and is likely to move by a similar margin in July.

But the euro zone is more exposed to the war in Ukraine and a threatened [cut off in gas supplies](https://www.financedigest.com/oil-gains-as-russian-supply-cuts-temper-concerns-over-rate-hikes-high-stocks.html "Oil gains as Russian supply cuts temper concerns over rate hikes, high stocks") from Russia could tip the bloc into recession, leaving policymakers with a dilemma of balancing growth and inflation considerations.

(Writing by Mark John; Editing by Toby Chopra, John Stonestreet and Catherine Evans)


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