ECB Lifts Rates for the First Time in 11 Years

Brian Turner
21 Jul, 2022
New York City

European markets traded mixed after the central bank lifted rates for the first time in eleven years and Italian political turmoil deepened. 

The DAX index eased 0.17% to 13,257.90, the CAC-40 index rose 0.6% to 6,220.59, and the FTSE 100 index decreased 0.4% to 7,234.52.  

The European Central Bank lifted its key lending rate by 50 basis points to cool rapidly advancing inflation in the currency zone of 19 nations. 

The governing council lifted the rates more than the 25 basis points of increase  expected by traders and economists. 

With the latest increase, the key lending rate is zero and the central bank had previously signaled rate hikes at the next meetings in July and September. 

The deposit rate is now set at zero, the main refinancing rate at 0.50%, and  the marginal lending facility is 0.75%. 

The euro strengthened after the rate decision to $1.0245. 

The central bank reiterated its commitment to bring down the inflation rate to its target rate of 2% as supply constraints and rising energy prices lifted June inflation to 8.6%. 

"We expect inflation to remain undesirably high for some time, owing to continued pressures from energy and food prices and pipeline pressures in the pricing chain," the accompanying statement noted. 

The ECB also said that the "inflation continues to be undesirably high and is expected to remain above our target for some time. The latest data indicate a slowdown in growth, clouding the outlook for the second half of 2022 and beyond."

With the diverging interest rates in the eurozone and heightened political turmoil in Italy, the central bank released a new tool to offer additional lending facilities with stringent conditions in the event of severe bond market conditions. 

The anticipatory move is expected to keep the smooth functioning of the eurozone bond markets and the details of the terms and conditions are scheduled to be released later today at 3:45 p.m. Frankfurt time.  

The yield on the 10-year Italian government bonds shot up to 3.6014% after Prime Minister Mario Draghi offered his resignation. 

Draghi will continue as a "caretaker" prime minister until the president Sergio Mattrarella decides next steps. 

Draghi decided to resign after three coalition partners - the center right parties The League and Forza Italia and the populist 5-Star Movement - withdrew its support to the 17-month old national unity government..