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Radio France Internationale
Radio France Internationale
World
Michael Fitzpatrick

ECB hikes interest rates for the first time in more than a decade as outlook darkens

Tough times a-comin'. ECB chief Christine Lagarde. AFP/File

The European Central Bank brought an end to the era of negative interest rates in the eurozone, with a bigger than expected half-point hike, intended to combat soaring inflation. ECB President Christine Lagarde has warned of a darkening economic outlook.

The Frankfurt-based ECB had earlier suggested that it would raise rates by 25 basis points.

Thursday's more aggressive 50-point shift, the bank's first rate hike since 2011, reflected an updated "assessment of inflation risks", according to an ECB statement.

Surging energy costs as a consequence of the Russian invasion of Ukraine saw consumer prices in the eurozone rise at the rate of 8.6 percent in June, an all-time high for the currency union and well above the ECB's target of two percent.

With prices rising steeply, the euro weak against the dollar and other central banks increasing interest rates, the ECB was under pressure to act decisively.

Thursday's hike means the ECB's deposit facility rate in now zero percent. In other words, the central bank no longer has to pay interest to commercial banks which park their cash at the ECB overnight. It'sfirst time in eight years that ECB rates have been non-negative.

The bank's other key interest rates rose automatically, also climbing by a half-point.

A winter of discontent

The decision reflected anxiety on the ECB governing council that the window of opportunity to raise interest rates could be closing, according to market analysts.

Future rate hikes "will be appropriate", the ECB said, as it looks to catch up with the US Federal Reserve and the Bank of England which both started raising rates earlier and more aggressively.

The risk that the eurozone will pitch into recession later this year would make any later increase in rates impossible..

"Russia's unjustified aggression towards Ukraine is an ongoing drag on growth" which is also driving inflation, likely to remain "undesirably high for some time", ECB chief Christine Lagarde told reporters at a press conference.

Europe's dependence on Russian energy imports has eurozone members bracing for a difficult winter and planning to ration supplies if Moscow halts gas deliveries.

Together, those factors are "significantly clouding the outlook for the second half of 2022," Lagarde said.

Don't mention Italy  

Political turmoil in Rome cast a shadow over the announcement, with the resignation of Italian Prime Minister Mario Draghi on Thursday sending shivers through government debt markets.

Lagarde pointedly declined to comment specifically on the crisis in Italy, instead stressing that ECB moves were designed to "address a specific risk that all euro area countries can face".

Markets open slightly weaker

European stock markets opened mostly on a weaker footing on Friday as investors digested the implications of the ECB's bigger-than-expected rate cut and a mixed showing in Asia.

The euro lost most of its recent gains on Asian markets Friday after the European Central Bank ramped up borrowing costs. Energy concerns and Italian political turmoil added to worries of a recession in the currency union.

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