The European Central Bank has raised its interest rates for the first time since 2011, ending an eight-year stretch of negative rates.
The ECB raised its deposit rate by 50 basis points to zero, having previously indicated a likely increase of 25 basis points. Also announced was a new bond-buying program to keep borrowing costs manageable for the euro zone’s most heavily indebted countries.
It also raised the rate on its weekly and daily cash auctions by 50 basis points to 0.50% and 0.75% respectively, and signaled that further increases in its three rates were likely to come this year.
The bank has opted for a more aggressive route as it battles with soaring inflation in the euro zone. Earlier indications had suggested an end to negative interest rates, which had been in place since 2014, in September.
“At the Governing Council’s upcoming meetings, further normalisation of interest rates will be appropriate,” the ECB said. “The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions.”
Alongside the announced increase, the ECB also laid out plans to help protect more debt-vulnerable nations with a new tool called the Transmission Protection Instrument (TPI). This will allow the bank to purchase bonds when it sees significant divergence in borrowing costs among the euro zone’s 19 countries, maintaining stability.
“The scale of TPI purchases depends on the severity of the risks facing policy transmission. Purchases are not restricted ex ante,” the ECB said.