Along these lines, the ECB board remarked that “governments in general don’t like rate hikes” and that these “They weigh on the budgetary position because they make it more expensive to issue new debt.”
On December 25, the ECB ordered a new increase in its interest rates of 50 basis pointsfollowing the line of moderation carried out the previous day by the US Federal Reserve (FED), while warning that the economy of the monetary bloc could enter into contraction at the end of this year.
After maintaining its rate for years at minimum levels with the aim of boosting the economy of the 19 countries that use the euro, The ECB has carried out four rate increases since July: one of 50 points, two of 75 and the new one of 50 points.
As a result of the 50-point rise this month, which coincides with the expectation that economists and the market had, now the interest rate for financing operations, the deposit and the loan facility, will rise to 2.50%, 2.75% and 2%respectively, the highest level since late 2008.
The objective is to curb inflation that, driven by energy and food prices,peaked at 10.6% year-on-year as the bloc average during October, before falling to 10% last month, the first decline in the index in 17 months.
“Raising rates generally also leads to higher risk premiums; it’s a normal process, posing no problems as long as it’s done in an orderly way.”Schnabel explained when defending the ECB’s provision.
He then clarified: “But we know that market disturbances are more frequent in these phases, and that we can continue on our path of rising interest rates only if at the same time we make sure that there will be no shocks in the bond market.”
That is why it is being applied “flexibility in repurchasing maturities of bonds purchased under the PEPP pandemic program”Schnabel concluded.
To counteract the impact on the euro area economy, the ECB launched the Pandemic Emergency Purchase Program (PEPP) in March 2020.
Source: Ambito
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