ECB raises interest rates by 0.5 percentage points for the first time in 11 years

Historic decision by the European Central Bank. Following a meeting of the Governing Council on Thursday, the ECB has decided to raise the three official interest rates by 50 basis points, the first increase in eleven years, and has approved the Transmission Protection Instrument (TPI).

The measure is aimed at curbing the rise in inflation in Europe caused by the energy crisis and the Russian invasion of Ukraine, which reached the historic figure of 8.6% in the Eurozone last June, according to Eurostat data. Alongside this, aggressive monetary tightening in other jurisdictions has been another reason for the institution to break its roadmap to prevent the euro's collapse.

"We discussed the pros and cons, we decided that it was appropriate to take a further step away from negative interest rates on the basis of several elements that have changed compared to the June meeting," European Central Bank president Christine Lagarde announced at a press conference after the Governing Council meeting.

Lagarde also defended the implementation of the TPI (Transmission Protection Instrument), a new instrument that aims to prevent the risk premiums of some countries in the euro area from soaring. The TPI will be activated to counteract unwanted or disorderly market dynamics that pose a serious threat to the transmission of monetary policy in the euro area as a whole.

Approved unanimously by the 25 members of the Council, the TIM can be activated in countries with "certain circumstances" and when the Governing Council decides that a country is eligible for it, i.e. when it fulfils four criteria: compliance with the EU fiscal framework, absence of severe macroeconomic imbalances, fiscal sustainability by verifying that the path of public debt is sustainable, and sound and sustainable macroeconomic policies.

The ECB President also informed that interest rates will continue to rise, but each move will be decided on a meeting-by-meeting basis. "Every time clouds for the second half of 2022 and beyond," said Lagarde, citing runaway inflation caused by sanctions on Moscow. Thus, although all indications are that interest rates will continue to rise as the energy crisis drags on, it will not be known what the rise will be until the day of the Council meeting. 

The 50-point rise, which has not occurred for 22 years, has surprised markets that were expecting a rise of around 25 basis points, something that makes it difficult for the most vulnerable countries to overcome their debt. In addition, another historic reason is that the eurozone is officially abandoning negative interest rates for the first time since 2014.

This new ECB decision is increasing uncertainty on the stock markets and among European citizens, who will be affected mainly by the increase in the cost of variable-rate loans and mortgages. This is also the case with the rise in the Euribor this Wednesday, which reached 1.164%, its highest level since July 2012.

Moreover, the rise in interest rates will discourage consumption, as Lagarde has also stated about the "economic slowdown" we are experiencing. In this sense, it is worth remembering that in 2021 alone in Spain the CPI increased twice as much as wages, causing citizens to lose purchasing power.

The situation, for the time being, tends to mean that inflation will continue to rise and the ECB will have to adopt more measures to remedy it, including further interest rate increases.