European Central Bank raises key interest rates by 50 bps

22 Jul '22

2 min read

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As part of the European Central Bank’s (ECB’s) policy rate normalisation plan to ensure that inflation comes back to its 2 per cent target over the medium term, the Governing Council of the ECB has increased three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI). New rates will come into effect from July 27.

The Governing Council arrived at the decision after an updated evaluation of inflation risks and the support given by the TPI for the efficient transmission of the monetary policy. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be raised to 0.50 per cent, 0.75 per cent, and 0.00 per cent respectively, a ECB press release said.

The TPI would be an add-on to the Governing Council’s toolkit and can be applied to deal with unwarranted, disorderly market dynamics that create obstacles for the transmission of the monetary policy across the euro area. The scale of the TPI purchases rests on the severity of the risks confronting policy transmission. Purchases are not limited ex ante. By upholding the transmission mechanism, the TPI will permit the Governing Council to deliver on its price stability mandate more efficiently.

“In any event, the flexibility in reinvestments of redemptions coming due in the pandemic emergency purchase programme (PEPP) portfolio remains the first line of defence to counter risks to the transmission mechanism related to the pandemic,” the release added.

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