The ECB raised interest rates more than expected, i.e. by 0.5 percentage points

The European Central Bank raises its three key interest rates more than expected. Director general Christine Lagarde is currently justifying monetary policy decisions at a press conference in Frankfurt.

For months, the bank has been watching the acceleration of inflation from the sidelines, and now it is taking action.

Back in June, the bank said it intended to raise interest rates in July by only 0.25 percentage points. Now interest rates will rise twice as much, i.e. 0.5 percentage points.

The reason is galloping inflation faster than predicted. Eurozone consumer prices are already rising at a rate of almost nine percent.

Interest rate increases will continue in the fall.

– It is necessary to raise interest rates even more in future meetings. The era of negative interest rates is over, the ECB states in its statement.

According to Christine Lagarde, central bankers debated the pros and cons of a larger-than-planned rate hike, and in the end all 19 country representatives and six executive board members agreed on it.

The common will of bankers is to get rid of the period of negative interest rates. There is a strong fear of inflation in the background, because inflation can be tamed by raising the price of borrowed money.

At its meeting, the ECB Council also approved a new support instrument, the bond purchase program, which will prevent the interest rates of the most indebted euro countries from rising uncontrollably in the market.

It is only introduced when panic occurs in the market.

– A new monetary policy instrument can be introduced if unjustified or uncontrolled market development threatens to seriously change the effect of monetary policy in different countries of the euro area, the ECB formulates.

According to Lagarde, the ECB Council decides on launching the instrument.

– With the new monetary policy instrument (Transmission Protection Instrument, TPI), it is possible to support the effective transmission of the impact of monetary policy to the economy, in the bulletin (you will switch to another service) it is said.

The purpose of the support instrument is to ensure that the effect of the rise in interest rates is similar in the different countries of the euro area. A common monetary policy is a prerequisite for the ECB to be able to maintain price stability in the euro area, the ECB states.

– All eurozone countries can receive support from TPI, Lagarde said at the press conference.

The main task of the ECB is to maintain price stability. By raising interest rates, the ECB tightens the reins when inflation soars and consumer prices rise.

The timing of the tightening is tricky, because at the same time economic growth in the euro area is slowing down and the confidence of both consumers and companies is at rock bottom. The energy crisis may worsen if Russia cuts its gas supplies to Europe at the end of the year.

– Price pressures continue to expand into new areas. Energy prices may remain high in the near future, Lagarde said on Thursday.

According to Lagarde, salary requirements have also increased slightly, but they have remained reasonable. If wage increases were widely demanded, it could accelerate the rise in consumer prices.

The ECB’s deposit rate is described above. That’s what the central bank pays for deposits that commercial banks make to the central bank overnight. The interest rate is also passed on to regular bank loan customers.

The most common reference interest rate for Finnish mortgages, i.e. the 12-month Euribor, already crossed the one percent mark in June.

Euribor is the interest rate at which banks lend money to each other. Banks lend these funds to their customers by adding a loan margin.

During the meeting, both analysts and investors and the central bankers themselves were on different lines about the size of the increase.

For example, a chief analyst at Danske Bank Minna Kuusisto estimated in an interview with that the bank will stick to its previous policy of only a 0.25 percentage point increase.

– It would be quite difficult for the ECB to break away from the instructions it gave at the previous meeting. I consider it a matter of credibility that the increase of 0.25 percentage points is kept, Kuusisto said.

Since the ECB raises all three of its key interest rates by the same amount, it says that the bank is afraid of inflation accelerating to even wilder figures than the current ones.

The monetary policy of the ECB is complicated by the fact that Italy, the third largest euro economy, has drifted into a bad government crisis. In addition to Italy, the yield requirements for the bonds of other southern countries have risen recently.

When the interest rates on the countries’ government loans rise, the countries have to spend an increasingly large part of their income on interest and loan repayments.

The bankers have had to formulate the conditions for receiving the support with tongue in cheek, because according to its own rules, the ECB is not allowed to use monetary policy to directly finance member countries. If it oversteps the bounds of its mandate even an inch, Germany’s squeamish constitutional court will likely step in.

On the other hand, the ECB’s intentions alone are a powerful weapon.

– It may very well be that the ECB talks about a purchase program, which does not need to be implemented, Danske Bank’s Kuusisto assessed during the meeting. In this way, the mere knowledge that the ECB is ready to act if necessary would be sufficient for the market.

The last time the ECB tightened monetary policy and raised interest rates was in 2011. In retrospect, interest rate decisions were considered too hasty, as the euro crisis only deepened. At that time, there was even speculation about the breakup of the euro.

The very next year, a new general manager Mario Draghi led by the central bank made a corrective move and pushed interest rates below one percent for the first time.