European Central Bank raises the interest rate by 0.5% — the first hike in 11 years

YEREVAN (CoinChapter.com) — The European Central Bank (ECB) has raised its benchmark interest rate by 50 basis points, bringing its deposit rate to zero. The hike is more than the 0.25 points which economists expected. 

This marks the first time in 11 years that the ECB increased its interest rate. The decision comes amid soaring inflation, partly caused by the Russian invasion of Ukraine. 

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Europe hit by inflation.  

The Covid-19 pandemic, followed by the prolonged lockdowns in China, disrupted global supply chains. With Moscow turning off its gas supply to most of Europe, the continent is feeling the heat. 

Last month, inflation in the eurozone increased by an alarming 8.6%, highlighting the need for higher interest rates. Meanwhile, annual inflation in the European Union jumped to 9.6% in June.

“The governing council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75%, and 0.00% respectively, with effect from 27 July 2022,”

the ECB announcement read.  

The decision of the 19-member Eurozone’s apex bank follows similar measures in England and the United States. Last month, the Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 6-3 to increase Bank Rate by 0.25 percentage points to 1.25%. 

Last month, the U.S. Federal Reserve also hiked interest rates by 75 basis points (0.75%), making it the Fed’s most aggressive hike since 1994. 

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Can the European Central Bank help Euro recover?

The ECB’s decision has already had a spillover effect. For example, the central bank of Denmark hiked its current account rate to minus 0.1% from minus 0.6%, according to a Bloomberg report. 

The move comes to maintain the Krone’s peg to the Euro.

Meanwhile, the Euro continues to plunge against the US Dollar. Earlier this month, the Euro fell below the dollar for the first time in nearly 20 years. 

On July 14, 2022, Eurozone’s currency plunged to a low of 0.9952 against the USD. When writing, the Euro has fallen around 11% year-to-date against the dollar. 

Until now, ECB’s unreadiness to hike up interest rates amid rising inflation has weakened the Euro further. 

A weakening currency had imports more expensive for eurozone countries. In particular, goods priced in US dollars have increased in value. Natural gas prices in Europe have also more than doubled since Russia’s invasion of Ukraine, 

The European Central Bank is scheduled to meet next on September 8. If the situation persists, the ECB might increase its benchmark interest rate by 50 basis points.

Meanwhile, the ECB Governing Council reiterated its plans to adjust its instruments within its mandate to ensure that inflation stabilizes at its 2% target over the medium term.