ECB kicks off rate-hiking cycle with a 50-bp increase

European Central Bank (ECB) on Thursday raised key interest rates by 50 basis points, the first increase since 2011, in an effort to normalize its monetary policies. (ECB/Handout via Xinhua)

FRANKFURT, July 21 (Xinhua) -- The European Central Bank (ECB) on Thursday raised key interest rates by 50 basis points, the first increase since 2011, in an effort to normalize its monetary policies.

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility, the three key ECB interest rates, will be increased to 0.50 percent, 0.75 percent and 0.00 percent respectively, with effect from July 27, 2022, said an ECB statement after a governing council meeting here.

The decision to raise interest rates by 50 basis points, bigger than expected, came as a surprise since the central bank flagged in June a 25-basis point increase in July as part of its forward guidance.

"The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalization path than signalled at its previous meeting," the central bank explained.

After the rate hike, the deposit interest rate will exit the negative territory for the first time since June 2014, which, according to the ECB, allows it to "make a transition to a meeting-by-meeting approach to interest rate decisions."

The ECB also confirmed that the governing council has approved the Transmission Protection Instrument (TPI), an anti-fragmentation tool designed to rein in soaring government bond yields of some peripheral countries in the euro area.

The ECB went on to clarify that the TPI "can be activated to counter unwarranted disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area."

Italy's 10-year bond yield topped 4 percent at one point on June 14 and is still hovering at around 3.6 percent during the trading on Thursday.

The ECB rate hike came at a time when the euro area is gripped by roaring inflation. Price hikes in the euro area are going through the roof, which registered an annual inflation of 8.6 percent in June.

The ECB maintains that the 50-basis point rate hike will support the return of inflation to its medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.

Last week, the European Commission downgraded the growth forecast for the euro area, lowering it to 2.6 percent in 2022 and 1.4 percent in 2023. 

European Central Bank (ECB) on Thursday raised key interest rates by 50 basis points, the first increase since 2011, in an effort to normalize its monetary policies. (ECB/Handout via Xinhua)