European Central Bank Hikes Interest Rates 75 Basis Points

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Facts

  • On Thursday, the European Central Bank (ECB) – which governs monetary policy for the 19 countries that use the euro – raised its deposit rate by 75 basis points to 1.5%, its highest rate since 2009.1
  • The ECB cited skyrocketing European inflation, which rose to 10% in September, for the hike. It also expects to 'have further rate increases in the future' until inflation is brought down to its target level of 2%.2
  • The ECB also said it would change the terms and conditions of its targeted longer-term refinancing operations — a tool that provides attractive financing to European banks and is designed to incentivize lending.3
  • It added, however, that, starting Nov. 23, banks will be required to pay a rate either equal to the deposit rate or the ECB's primary refinancing rate to promote banks to repay the ECB.1
  • ECB Pres. Christine Lagarde said that the bank would also halt its plans to sell some of the €5T ($4.9T) of government bonds it holds, many of which were issued by the eurozone's weakest countries.4
  • This move comes as the ECB on Thursday also took its first step toward shrinking its €8.8T ($8.76T) balance sheet, which is likely to raise borrowing costs even further in what some see as a disguised rate hike.5

Sources: 1Reuters, 2Business Insider, 3CNBC, 4Guardian and 5FOX News.

Narratives

  • Establishment-critical narrative, as provided by Uk.Yahoo. The ECB seems to be protecting its own reputation, not the economies of eurozone countries. While stronger economies like Germany may be able to weather rate hikes like this, more robust borrowers like Italy won't be able to sustain such measures. Slowing demand isn't the solution, so all the ECB is doing is pushing Europe toward a recession to save face.
  • Pro-establishment narrative, as provided by Default. The ECB has already made immense progress on cooling borrowing, but there's more to be done. This third interest-rate increase will help combat the rising prices caused by energy, supply chain problems, and post-pandemic recovery issues.