FRANKFURT, Germany (AP) 鈥� The European Central Bank raised interest rates Thursday for the first time in 11 years by a larger-than-expected amount, joining and other major central banks to target stubbornly high inflation.
The move raises new questions about whether the rush to make credit more expensive will at the cost of easing prices for people , and everything in between.
The ECB鈥檚 surprise hike of half a percentage point for the 19 countries using the euro currency is expected to be followed by another increase in September, possibly of another half-point. Bank President Christine Lagarde had last month, when .
She said the bigger hike was unanimous as 鈥渋nflation continues to be undesirably high and is expected to remain above our target for some time.鈥� As the bank leaves an era of negative interest rates, Lagarde said economic forecasts don't point to a recession this year or next but she acknowledged the uncertainty ahead.
鈥淓conomic activity is slowing. Russia鈥檚 unjustified is an ongoing drag on growth,鈥� the ECB chief said at a news conference. Higher inflation, supply constraints and uncertainty 鈥渁re significantly clouding the outlook for the second half of 2022 and beyond.鈥�
The ECB is coming late to its rate liftoff 鈥� a token of inflation that turned out to be higher and more stubborn than first expected and of the heavily exposed to the war in Ukraine and a . Recession predictions have increased for later this year and next year as soaring bills for electricity, fuel and gas deal a .
The ECB made the bigger-than-expected increase to underline its determination to get inflation under control after its late start, said Carsten Brzeski, chief eurozone economist at ING bank. The move aims 鈥渢o restore the ECB鈥檚 damaged reputation and credibility as an inflation fighter.鈥�
鈥淭oday鈥檚 decision shows that the ECB is more concerned about this credibility than about being predictable,鈥� Brzeski said.
Recession concerns have helped , which adds to the ECB's task by worsening energy prices that are driving inflation. That is because oil is priced in dollars.
Raising rates is seen as the standard cure for excessive inflation. The ECB's benchmarks affect how much it costs banks to borrow 鈥� and so help determine what they charge to lend.
But by making credit harder to get, rate increases can slow economic growth, a major conundrum for the ECB as well as for the Federal Reserve. in June and could do so again at its next meeting. The , and even Switzerland's central bank last month.
The goal for all central banks is to get inflation back down to acceptable levels 鈥� for the ECB, it's 2% annually 鈥� without tipping the economy into recession. It's difficult to get right as central banks reverse what has been a decade of very low rates and inflation.
鈥淭he most precious good that we can deliver and that we have to deliver is price stability. So we have to bring inflation down to 2% in the medium term. That is the imperative,鈥� Lagarde said. 鈥淎nd it鈥檚 time to deliver.鈥�
Yet the European economy has the added worry of , which is used to generate electricity, heat homes and fuel energy-intensive industries such as steel, glassmaking and agriculture. Even without a total cutoff, , with countries over sanctions and support for Ukraine.
Rising interest rates follow the end of the bank's 1.7 trillion-euro (dollar) stimulus program that helped keep longer-term borrowing costs low for governments and companies as they weathered the pandemic recession.
Those bond-market borrowing rates are now rising again, especially for more , where has brought back bad memories of Europe鈥檚 debt crisis a decade ago. Markets fear the exit of the former ECB president, who has pushed policies meant to keep debt manageable and boost growth in Europe鈥檚 third-largest economy, could raise the risk of another eurozone crisis.
The bank approved a new that is part of its arsenal to prevent that from happening again. The ECB would step into markets to buy the bonds of countries facing excessive and unjustified borrowing rates. But it wouldn鈥檛 offer protection if the ECB determines higher borrowing costs resulted from poor government decisions.
Buying bonds drives their price up and their yield down, because price and yield move in opposite directions, thus capping interest costs. Spiraling bond-market rates threatened to break up the euro in 2010-2012 and led Greece and countries to turn to other members and the International Monetary Fund for bailouts.
This problem is unique to the ECB because it oversees 19 countries that are in different financial shape. The backstop aims to 鈥渟afeguard the smooth transmission of our monetary policy stance throughout the euro area,鈥� Lagarde said.
The ECB's lowest rate, the deposit rate on money left overnight by banks, was raised from minus 0.5% to zero.
David Mchugh, The Associated Press
