Rising inflation and approval of a new Transmission Protection Instrument prompted the ECB to hike by more than it had initially indicated.
The European Central Bank raised rates by a higher-than-expected 50 basis points on Thursday and said it had approved a tool to prevent any blowout in eurozone bond spreads, though much of the detail of the new facility remains to be revealed.
Rising inflation prompted the ECB to double the size of its first hike in 11 years from the 25 basis points it had indicated was likely in June, despite significant downside risks to growth from the war in Ukraine, President Christine Lagarde told a news conference.
Further hikes can be expected at upcoming meetings, Lagarde said, as the ECB transitions to “a meeting-by-meeting approach to our interest rate decisions.” Unlike in June, Lagarde did not give forward guidance as to the size of future hikes, and indicated that the pick-up in the pace of rate-rises did not imply a change in this cycle’s interest rate end point.
“All members of the Governing Council rallied to the consensus of 50 basis points,” she said, adding that this was made possible by unanimous support for the new Transmission Protection Instrument, whose purchases will have no pre-defined limit.
Activation of the TPI will be at the discretion of the Governing Council, and depend on criteria including compliance with the EU fiscal framework, not being subject to an excessive deficit procedure, absence of severe macroeconomic imbalances, fiscal sustainability, and compliance with plans submitted for the EU’s Recovery and Resilience Facility.
Purchases under the TPI will end “either upon a durable improvement in transmission, or based on an assessment that persistent tensions are due to country fundamentals,” a separate document published by the ECB stated. Transactions will focus on public sector securities with a maturity of between one and 10 years, although private sector bonds may also be considered, according to the document, which left many parameters of the new tool undefined. (See MNI SOURCES: Divisions Remain Over ECB's New Crisis Tool)
“The risks to the medium-term inflation outlook include a durable worsening of the production capacity of our economy, persistently high energy and food prices, inflation expectations rising above our target and higher than anticipated wage rises,” Governing Council members said.