The ECB is raising its key interest rate for the first time since 2011 and is reacting to the escalating inflation with a sharp upward step. The currency watchdog around ECB boss Christine Lagarde decided on Thursday to increase the so-called main refinancing rate by half a point to 0.50 percent. The deposit rate was also raised – to 0.00 percent. Banks no longer have to pay extra if they park excess money at the ECB. The turnaround of the European Central Bank (ECB) after an era of ultra-loose monetary policy is considered historic.

The Governing Council of the ECB had already initiated the change of course at its previous meeting in June, but held out the prospect of a smaller rate hike of 0.25 percentage points each time. “The ECB Governing Council considered it appropriate to take a larger first step towards normalizing interest rates than it announced at its last meeting,” the central bank said. This decision is based on the ECB Governing Council’s updated assessment of inflation risks.

Critics accuse the ECB of initiating the turnaround in interest rates far too late. Inflation in the euro zone has been rising to record levels for months. At the same time, the economic prospects have deteriorated due to the war in Ukraine. If the ECB raises interest rates too quickly in this environment, this could become a burden, especially for heavily indebted countries in Southern Europe.

In order to ensure that interest rate increases do not unduly burden countries such as Italy and to prevent fragmentation of the currency area, the ECB is launching a new anti-crisis program, the so-called Transmission Protection Instrument (TPI).

“The TPI will complement the Governing Council’s toolbox and can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy in the euro area,” the central bank said. “The size of purchases under the TPI depends on the severity of the risks to monetary policy transmission. The purchases are not restricted from the outset.”

The ECB pushed ahead with work on this new anti-crisis instrument after unrest on the financial markets in mid-June. The yield gap – the spread – between government bonds from Germany and those of more heavily indebted euro countries, especially Italy, widened after the ECB announced a first interest rate hike in the summer. Means: For countries like Italy it will be more expensive to get fresh money. This could become a problem for such states in view of the already enormous mountains of debt.

But persistently high inflation is forcing the ECB to act. ECB President Christine Lagarde said at the end of June that the process of normalizing monetary policy would be “resolutely and sustainably continued”. Other central banks such as the US Fed and the Bank of England have already raised their interest rates several times.

In June, consumer prices in the euro area were 8.6 percent higher than in the same month last year. For 2022 as a whole, the EU Commission expects inflation to average 7.6 percent in the currency area of ​​the 19 countries. That would be a historic high and far above the stable price level aimed for by the ECB with an annual inflation rate of two percent. Higher inflation reduces the purchasing power of consumers because they can then afford less for one euro.