The ECB raises interest rates 0.5 points, twice as expected, in the face of the price crisis

The European Central Bank has ushered in a new era: it has raised rates for the first time in 11 years. And it has done twice as much as initially announced, half a point, 50 basic points, when the president of the entity, Christine Lagarde, spoke of 0.25 on June 9, after an emergency meeting. It is the biggest rate hike in 22 years by the ECB.

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The ECB intends to puncture the inflation bubble, although inflation is not just a matter of excess demand, but of a context of war in Europe and an energy crisis. But the ECB seeks with its rise a regulation from another time: raising rates cuts consumption, hinders the ability to borrow and encourages savings. But that has little to do with the flow of energy from Gazprom, for example, or with a marginal energy market that, as the president of the European Commission, Ursula von der Leyen, herself acknowledges, has ceased to make sense.

Thus, the Governing Council of the ECB has decided this Thursday to raise the entity's three official interest rates by 50 basis points. Consequently, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will increase to 0.50%, 0.75% and 0.00%, respectively, with effect from July 27, 2022.

"The decision will contribute to the return of inflation to the ECB's medium-term objective, strengthening the anchoring of inflation expectations and ensuring the adjustment of demand conditions for the achievement of its medium-term inflation objective", affirms the ECB : “The advanced step to get out of the negative interest rates agreed today [por este jueves] allows the Governing Council to transition to an approach where decisions on interest rates will be taken at each meeting. The future path of official interest rates agreed by the Governing Council will continue to depend on the data and will help it meet its inflation target of 2% in the medium term”.

TPI: new instrument to appease risk premiums

This Thursday the European Central Bank also specifies the instrument to clamp risk premiums in countries that need it announced at an emergency meeting a month ago in Frankfurt, a mechanism to respond to the pressure on the debt of countries like Italy, plunged also in a new political crisis. This new anti-fragmentation instrument must be able to spend more in some jurisdictions than in others –in Spain, Italy, France and Greece, for example–.

“The Governing Council has considered that the establishment of the Transmission Protection Instrument (TPI) is necessary to support the effective transmission of monetary policy. In particular, while the Governing Council continues to normalize monetary policy, the ICC will ensure the smooth transmission of the monetary policy stance to all countries in the euro area. The unity of the monetary policy of the Governing Council is an essential condition for the ECB to fulfill its mandate of maintaining price stability”, says the ECB.

The central bank adds: “The TPI will add to the toolkit and can be activated to counter unwanted or disorderly market dynamics that constitute a serious threat to the transmission of monetary policy in the euro area as a whole. The volume of purchases under the TPI will depend on the seriousness of the risks for the transmission of the policy. There are no ex ante restrictions on purchases. By safeguarding the transmission mechanism, the TPI will allow the Governing Council to more effectively fulfill its mandate to maintain price stability.”

“In any case”, says the ECB, “the flexibility in reinvesting the principal of the securities in the portfolio of the pandemic emergency purchase program (PEPP) that are maturing continues to be the first line of defense to counteract the risks to the transmission mechanism related to the pandemic”.

the bank wins

There are three countries in which a higher income for banks is expected with the rise in interest rates: Spain, Italy and Portugal. Southern Europe is the one that has been pointed out as the region in which its banks are going to benefit the most.

Moody's noted that Spanish banks, along with Italian and Portuguese banks, are expected to benefit more than those in northern Europe. The main reason that this analysis house points out is that these are markets where there is a large percentage of the mortgages granted that are at a variable rate and, therefore, they will have higher income for the banks with the rise in interest rates . For the rest of Europe, however, the effect will be "gradual and moderate."

Fitch, for its part, pointed out that among these three countries, it is the Spanish banks that are going to benefit the most from the change in interest rate policy. The agency justified this analysis by pointing out that, despite the fact that Spain will not recover the pre-pandemic level of GDP until next year, this course will lead the improvement of the economy, at least in southern Europe. This "provides better business opportunities for domestic banks," he said. Fitch also argued that the demand for mortgages is being resilient in the country. Added to this is the fact that Spanish banks arrive at this situation with significant cost savings, after the thousands of layoffs and closures last year, and will have a significant increase in income.

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