Central Banks
The ECB delivered a larger-than-expected 50-basis-point increase in July 2022, ending an era of negative interest rates and joining the global tightening cycle.
By Glen Elgin Editorial
On 21 July 2022, the European Central Bank raised its three key interest rates by 50 basis points, the first increase in 11 years and a larger move than the 25 basis points that had been previously signalled. The decision ended an extended period of negative interest rates in the eurozone.
The increase brought the ECB's deposit facility rate to 0.00%, the main refinancing operations rate to 0.50%, and the marginal lending facility rate to 0.75%. The move was prompted by eurozone inflation reaching 8.6% in June 2022, far above the ECB's 2% target, driven by energy and food prices exacerbated by the Russia-Ukraine conflict.
The ECB accompanied the rate decision with the announcement of the Transmission Protection Instrument (TPI), a new bond-purchase programme designed to prevent fragmentation in eurozone sovereign debt markets. The TPI was created in response to widening spreads between German bunds and the bonds of peripheral eurozone economies, particularly Italy, which had widened as the ECB signalled its intention to raise rates.
The decision to deliver a 50-basis-point increase rather than the previously communicated 25 basis points reflected mounting concern about inflation expectations. ECB President Christine Lagarde acknowledged that inflation was developing more persistently and that the larger move was appropriate given the inflation outlook.
For investors, the ECB's move highlighted the global nature of the monetary tightening cycle. With the Federal Reserve, Bank of England, and now the ECB all raising rates, the cost of capital was increasing across developed markets simultaneously. This had implications for fixed-income investments, equity valuations, and the relative attractiveness of different asset classes. Investors holding or considering fixed-term investments in European markets needed to reassess duration and credit risk in the new rate environment.
Source: European Central Bank
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