7/21/22 4:19 PM - Lesezeit

ECB takes first bold step

Andreas Auer

Chief Economist

...the ECB dares after all

The Governing Council of the European Central Bank (ECB) today raised key interest rates by 50 basis points for the first time in 11 years.

But that is not all: a new instrument called the Transmission Protection Instrument (TPI) was also adopted.
The Governing Council considered it appropriate to take a larger first step towards the normalisation of key interest rates than announced at the last meeting. This decision is based on the Governing Council's updated assessment of inflation risks and the expected support from the TPI.

Why TPI?

The ECB has come to the conclusion that the introduction of TPI is necessary to support the effective transmission of monetary policy. TPI will thus complement the ECB's toolkit and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area. The size of the TPI purchases depends on the severity of the risks to monetary policy transmission. Purchases are not limited in advance.

The conditions under which the TPI will be activated have not been specified in detail.  A further normalisation of interest rates is expected at the coming meetings.


But what exactly does normalisation mean? This is where the Gutmann opinion comes in!

With this first step, one also wanted to leave the negative interest rate terrain. This was achieved.

The deposit facility is now at 0%. Subsequently, the aim is to achieve normalisation by approaching the so-called "neutral key interest rate". This is the interest rate, which unfortunately cannot be defined exactly, that has neither an expansionary nor a restrictive effect. Even President Lagarde could not (or did not want to) reveal exactly where this interest rate is. But it is probably fair to see it in a range of 1 to 1.5%. In this case, the main refinancing facility is meant, which is now at 0.5%.
We assume that they will (quickly) try to move into this range and will therefore also raise key rates further at the next two interest rate meetings. We expect the interest rate hikes this year to total at least 100 basis points.

Why quickly?

Because the economic risks are still considerable and a slowdown is already clearly in the offing. Time is therefore short and swift action is necessary.

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