European Central Bank hikes interest rates for first time in 11 years

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Sign of the times: The ECB finally ended the eurozone's experiment with negative interest rates as it bumped up its base rate from minus 0.5 per cent to 0 per cent

European Central Bank hikes interest rates for first time in 11 years – and opts for unusually large rise as it battles red-hot inflation

  • ECB finally ended eurozone’s experiment with negative interest rates
  • It bumped up its base rate from minus 0.5 per cent to 0 per cent
  • It came just hours after Italy’s government, led by Mario Draghi, fell apart 

The European Central Bank has hiked interest rates for the first time in 11 years – and opted for an unusually large rise as it battles red-hot inflation. 

The ECB, headed by France’s Christine Lagarde, finally ended the eurozone’s experiment with negative interest rates as it bumped up its base rate from minus 0.5 per cent to 0 per cent.

It came just hours after Italy’s government, led by former ECB president Mario Draghi, fell apart, causing chaos in the country’s financial markets and sending the cost of borrowing soaring. 

Sign of the times: The ECB finally ended the eurozone’s experiment with negative interest rates as it bumped up its base rate from minus 0.5 per cent to 0 per cent

The ECB’s delayed reaction in the fight against the rising cost of living follows a string of rate hikes from the Bank of England and a bumper 0.75 percentage point rise from the US Federal Reserve last month – the largest since 1994. 

The ECB previously said it would only raise rates by 0.25 percentage points amid worries that a bigger move could tip the eurozone into a recession. 

But as fears mounted it was getting left behind after inflation hit a record high of 8.6 per cent, Lagarde yesterday declared it was ‘time to deliver’. 

Nick Chatters, of Aegon Asset Management, said: ‘Lagarde finally did what she needed to do and took rates out of negative territory.’ 

Central banks usually hike rates when inflation is overheating. In theory, this should help keep a lid on prices, encouraging households and businesses to save rather than spend. But the ECB has worried that lifting rates too quickly could throw the Covid recovery into reverse. 

It cut its base rate by so much during the pandemic to boost the economy that it was negative – meaning corporates were effectively being paid to borrow. 

Now, with eurozone countries in financial turmoil, getting away from negative rates is proving tricky. Draghi’s resignation prompted a sell-off of Italian government debt, causing the yield – or how much investors expect to be paid to lend – to shoot up. Germany has been battered by its reliance on Russian energy, as fuel costs soar. 

Andrew Mulliner, of Janus Henderson Investors, said the eurozone was now looking at a period of stagflation where lacklustre growth meets rising prices, spelling disaster for jobs and living standards. 

The ECB has now introduced a Transmission Protection Instrument (TPI), a scheme which will see it step in to buy government bonds in markets that are showing signs of strain. 

But Chatters said the TPI looks ‘weak not least as it relies on the ECB governing council to all subjectively agree if they are going to buy Italian bonds’. 

The ECB would have to hold ‘a meeting and a nice long chat before they can agree what to do’, Chatters said, adding: ‘We all miss Draghi’s firm hand on a day like this.’

Italy rocks markets 

Italian stocks slumped and bond yields rose as prime minister Mario Draghi stepped down.

He quit after three key parties in his coalition snubbed a confidence vote. 

Traders worried about where a new leader might take economic policy. 

Italy’s FTSE MIB index of leading companies fell as much as 2.9 per cent before recovering some of its losses to end 0.7 per cent lower. 

And traders rushed to sell government debt, known as bonds, as fears grew over Italy’s future. 

This pushed up bond yields, or how much investors are paid to lend to the government, to 3.6 per cent.

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