European Central Bank increases interest rate by 50 basis points

22 Jul 2022 , 08:30 AM

On Thursday, the European Central Bank announced a fresh bond-buying programme and increased interest rates for the first time since 2011. This was done to control borrowing costs for the euro zone’s most indebted nations.

In an effort to lower the euro zone’s record-high inflation rate, the ECB increased its deposit rate by 50 basis points to zero, roughly twice as much as it had suggested following its previous meeting.

The rate on its weekly and daily cash auctions was also increased by 50 basis points to 0.50% and 0.75%, respectively, and a signal was given that additional hikes to its three rates were likely to occur this year.

The ECB stated that additional interest rate normalization “will be appropriate” at subsequent sessions of the Governing Council. “The Governing Council can move to a meeting-by-meeting approach to interest rate decisions by frontloading the exit from negative interest rates today.”

The ECB also announced a new instrument, the Transmission Protection Instrument, in an effort to mitigate the effects of the increase in borrowing prices (TPI).

This will enable it to purchase bonds when it detects indications of financial fragmentation, such as an unjustified gap in borrowing costs among the 19 member states of the eurozone.

“The size of TPI purchases is based on how serious the dangers are to the transmission of policy. Purchases are not prohibited upfront “ECB stated.

Since 2014, the deposit rate has been negative, and the central bank of the eurozone had not increased rates in eleven years.