The European Central Bank (ECB) beat expectations in its first interest rate hike in 11 years.
The bank’s main refinancing rate is 0.50%; It increased the marginal lending facility to 0.75% and the deposit rate to 0%.
In the text of the ECB’s resolution, he stressed that further normalization of interest rates is appropriate in future meetings.
In the text of the decision, it is specified that the size of the next rate increases will be decided from one meeting to the next. In the text of the resolution, it was stated that the ECB would support the return of inflation to the target. “The future trajectory of the board’s key interest rate will be data dependent and will be adjusted for the medium-term inflation target of 2%,” the text said.
After the decision, 60 basis points of interest rate hikes for September were seen in money markets.
The ECB also approved the new transfer insurance mechanism, which is a bond instrument against the crisis. The transmission insurance mechanism can be activated in the event of an unexpected deterioration in market dynamics that could affect the ECB’s monetary policy transmission mechanisms.
After the decision, ECB President Lagarde appeared before members of the press.
Important statements in Lagarde’s statements were as follows:
Economic activity is slowing down. Russia’s war remains an obstacle to growth. The economic outlook for the second half is troubled.
Financial measures reduce the impact of the war. These measures must be targeted. Energy prices will remain high in the short term.
Pricing pressures spread to more industries. Many core inflation indicators have increased further. Inflation will remain excessively high for some time.
The labor market remains strong. Wage increases continued to increase gradually. Control of salary increases in total below.
The ongoing war is a downside risk to growth.
Inflation risks are on the rise. Signals of higher inflation expectations should be watched. Inflation will remain above target for some time.
The demand for loans to finance investments has declined. Household credit demand remained strong.
The decision on the transfer insurance mechanism was taken unanimously.
The exit from negative interest rates was appropriate. All members voted for a 50 basis point rate hike.
All members of the euro zone are eligible for the transfer insurance mechanism. This mechanism will help the ECB to respect its commitment to price stability. The ECB will take into account several indicators for this mechanism. Only the ECB will decide where to implement the mechanism.
Previous verbal advice for September is no longer valid. The ECB will decide month to month and will depend on the data.
The bond mechanism will avoid interfering with its political orientation. The new mechanism is designed for specific risks and will be an additional tool in the toolbox. There is no limit set for this mechanism.
The countries that will benefit from the mechanism must comply with the EU fiscal rule. There should not be a serious macroeconomic imbalance in the Member State. Financial viability is another criterion. Access to this mechanism requires the country to implement a sound macroeconomic policy.
The ECB is very wary of energy and gas prices.
25 basis points expected
The main refinancing rate, marginal lending facility and deposit rate are each expected to increase by 25 basis points on the median, according to a Bloomberg survey. Of the 53 economists surveyed, 49 predicted a 25 basis point increase in deposit rates, while 4 predicted a 50 basis point increase.
Prices in the money markets, on the other hand, indicated a 50-50 probability for 25 and 50 basis points.
The ECB had previously indicated that it planned to raise the key rate by 25 basis points in July and raise it again in September to a higher rate. However, sources familiar with the matter, speaking to Bloomberg, said the ECB’s 50 basis point hike in July was also on the cards due to the deteriorating inflation outlook.
Lagarde left the door open for a rise of more than 25 basis points
Earlier, ECB President Christine Lagarde used phrases that left the door open for interest rates to rise beyond 25 basis points.
Lagarde, who said authorities are ready to fight record inflation, reiterated the plan to hike rates by a quarter point at the July meeting and said she would act more quickly if the inflationary threat was increasing.
“If we see higher inflation threatening expectations, we’ll withdraw the stimulus sooner,” Lagarde said.
Lagarde, who said the magnitude of the energy and food shocks were creating uncertainty about inflation and that inflation was beginning to rise broadly in the services sector, drew attention to the fact that inflationary pressures can increase and that inflationary shocks also have a negative effect on growth. Despite this, he stressed that they expect positive growth.
A few days after this announcement, it was announced that consumer inflation in the eurozone had set a new record at 8.6%. In the days that followed, the parity also tested below level 1.
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