The European Central Bank raised interest rates by a larger-than-expected half-percentage point and unveiled a new plan to buy the debt of Europe’s most vulnerable economies, taking bold action to protect the currency union as it navigates the twin threats of skyrocketing inflation and slowing economic growth.
The move takes the ECB’s key interest rate to zero, ending the bloc’s eight-year experiment with negative interest rates and capping two weeks of drama for Europe, which saw Russia cut and then restart supply of vital natural gas and the government of Italy collapse.
The rate increase comes despite rapidly accumulating challenges facing Europe’s economy and the currency union’s cohesion – from a looming energy crisis to a protracted war next door, mounting political instability at home, and what many economists think has become an inevitable recession.
Some of these could make it difficult for the ECB to focus on combating inflation.
The ECB’s decision brings it more into line with other central banks, including the Federal Reserve, underscoring how the bank’s top officials are increasingly worried about high inflation.
The Fed is expected to raise its policy rate by 0.75 percentage point later this month to a range between 2.25 per cent and 2.5 per cent.
Inflation has risen to about 9 per cent on both sides of the Atlantic, and shows no sign of abating soon.
“There was tremendous pressure going into this meeting,” said one person familiar with the ECB’s discussions.
“The euro is weak, and you have the Fed which might raise rates by 75 or even 100 basis points. And then you come out with 25?”
Financial markets ricocheted after news of the increase.