To counter inflation, the European Central Bank decided to raise interest rates more than expected by 0.5 points

For the first time in more than a decade, the European Central Bank (ECB) announced on Thursday, July 21, it will raise interest rates by 0.5 point – more than expected – in the face of accelerating inflation and the threat of recession. This decision marks a major turning point after a long period of accessible money in the eurozone.

Thus, the main interest rate increases from zero, as it has been established since 2016, to 0.5%, while this tax portion of undistributed bank liquidity in credit, which has been negative since 2014, increases from -0.5% to zero. The increase is larger than expected: In June, the European Central Bank announced that the increase would be 0.25 points.

economic horizon “Oppress” In the eurozone, the President of the Union, Christine Lagarde, who warned that inflation will remain at the level ‘Unwanted high level for some time’. By raising the cost of credit, for the first time since 2011, the European Central Bank is following in the footsteps of other central banks around the world. The US Federal Reserve has been raising rates since March, and its Fed funds rate range, now set at between 1.5% and 1.75%, could increase by 75 basis points at the end of July.

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Protecting countries from speculative attacks on their debts

Also Thursday, the European Central Bank announced a new tool to protect the most fragile countries from speculative attacks on their debt – markets have Italy in their sights, as it begins a period of political instability. This tool It can be activated to counter unwarranted and uncontrolled market dynamics that seriously threaten the transmission of monetary policy in the eurozone.Which targets an inflation rate of 2% over the medium term, according to a press release issued by the Board of Governors.

Since the announcement in June of monetary policy tightening by the European Central Bank, embodied by this increase in key interest rates, interest rates on European public debt have risen significantly and the spread between borrowing rates in different countries has widened. The European Central Bank is talking about a “fragmentation” Eurozone, which hinders its policy and therefore must be combated.

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The Italian loan was trading Thursday morning at an average rate of 3.55%, or 223 basis points above the German 10-year interest rate, which is considered risk-free. This spread narrowed slightly to 219 basis points after the ECB announcements. Faced with the risk of exacerbating “fragmentation,” or even a debt crisis similar to the one in 2012, the Frankfurt Corporation has developed a new tool that is supposed to calm unruly markets.

One of the main characteristics of this program called “TPI” (“Transmission Protection Tool”) is that debt purchases will likely be unlimited to counter speculative attacks. The volume of purchases will depend on the TPI “The severity of the risks facing policy transmission” monetary. Through a better guarantee “transition” From its decisions with businesses and households, TPI will allow the European Central Bank “to more effectively fulfill its mandate of price stability”Institute adds.

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