14 ms·

European Central Bank rises rates by 0.5%

138 points by tlamponi 4y ago

tlamponi 4y ago
"The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022." The Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for now though, the latter is planned until 2024.
- miohtama 4y ago
  Does buying more bonds while raising interest rates means that the wealth is transferred somewhere? - Countries with broken economy like Italy win - Countries that kept their economy more viable lose - Zombie companies will keep going? - Mortage owners lose (some European countries have floating rate mortages)
  - IfOnlyYouKnew 4y ago
    Italy doesn't have a "broken economy". It's a stereotype that just won't die no matter what, I guess. Their politics and everything connected to it are arguably a bit more haphazardly than what's common in countries further north. But they have a solid industrial base and have been economically stable for 30+ years.
    - toyg 4y ago
      If anything, Italy is practically the most trustworthy treasury in the world: despite the highest debt/GDP ratio in the world after Japan, they have never defaulted on debt and even resorted to effectively expropriating their own citizens overnight rather than missing payments.
      - tlamponi 4y ago
        > even resorted to effectively expropriating their own citizens overnight rather than missing payments. source on that one?
        toyg 4y ago
        Google "Tassa patrimoniale Amato 1992". The government directly fetched 0.6% of all current account balances overnight.
        tlamponi 4y ago
        Thanks for that! The speculation against the pound and lira I heard of, but that was before my time and the retroactive tax wasn't ever thought in school, at least I'd like to think that I had remembered such things. Not sure how that would play out on todays (well, current as today Italy's last gov is no more) landscape...
        Phurist 4y ago
        You would not be able to understand it, it's domestic.
        tlamponi 4y ago
        What do you mean by that comment? I _am_ Italian.
    - kgwgk 4y ago
      Stable is not as good as growing: https://i.redd.it/puoyn3g0fb311.jpg https://i.redd.it/puoyn3g0fb311.jpg
    - qwytw 4y ago
      > have been economically stable for 30+ years Assuming 'stable' is a synonim for stagnationg and slow decline then yes. The 90's were pretty good but there has been been almost no real growth after the Euro was introduced in 1999. It's even worse in relative terms. Back in 1995-2000 Italy's GDP per capita was around 130% of the EU average, now it's less than 100% and not that far from the more succesful Eastern European countries which joined in 2004 (around 80-85%). And these numbers only tell a part of the story since the average GDP per capita went down significancly after most ex-communist countries joined the EU between 2004 and 2007. France, Germany, UK & Italy had almost equal GDP per capita in 2000, Italy was even ahead of France and Britain during most of the 1990's and look what happened later: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=IT-FR-DE-GB-EE https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locat... Obiouviously Italy is still a rich country with a "strong" economy but if it stays on the same trajectory for the next few decades it will likely become one of the poorest countries in the EU.
      - petre 4y ago
        > not that far from the more succesful Eastern European countries which joined in 2004 Most of those countries aren't in the Eurozone, with the notable exceptions of Slovakia and Lithuania.
        qwytw 4y ago
        Also Estonia, Latvia, Slovenia so the majority of countries which joined in 2004 have the Euro. If you also count Romania and Bulgaria which joined a couple of years later exactly 1/2 of the new member are in the eurozone.
  - closewith 4y ago
    That famously broken 12th-largest economy and 10th-largest exporter in the world.
    - cloutchaser 4y ago
      They can be a large economy but not be able to pay their debts without German help. Which is exactly what will happen now
  - tlamponi 4y ago
    > - Countries with broken economy like Italy win Check out this Twitter thread from an Austrian Economist PhD for some data points against that old and outdated stereotype: https://twitter.com/heimbergecon/status/1539486969977360384 https://twitter.com/heimbergecon/status/1539486969977360384
    - skippyboxedhero 4y ago
      That isn't news. The reason why Italy runs a trade surplus is because they are forced into running a primary surplus by deflationist policies from the German bloc. The reason private debt is relatively low is because their banks largely do not function and have turned into bailout mechanisms (and Italy had to take the step of bailing in private investors because they were unable to finance their debt, given the relatively large size of the banking sector, this basically froze their financial markets). Correct, Italy has run primary surpluses since the 90s...their debt is 150% of GDP, the conclusion is what? The other stuff is largely false...but assume it isn't, what is the explanation for Draghi's reforms? Youth unemployment is 35% (for reference, this is higher than many places in Africa). People confuse the policies that have been forced on Italy due to Germany's ordo-liberalism, and actual economic strength. Also, there is massive regional inequality within Italy. Some regions in the North are basically Germany. The companies are run by Germans, the investors are German, the population largely speak German. Those areas, it is true, do well. But if you are looking at Southern Italy, there are huge problems (and btw, anyone who is trying to tell you the opposite has an agenda, I have never seen this outside the context of "...so ordo-liberalism works, it must continue, deflationism works"...because if it is true that Italy is a basketcase, which it is then people start asking whether a fixed exchange rate is a good idea...which it isn't).
      - emanuele232 4y ago
        I agree with 3/4 of this comment, but the only region run by germans is Trentino, there are a couple regions that run on their own (Lombardia, Veneto and Piemonte). Said that, the more south you go the worse things get, and if you pass Rome the situation is tragic
  - mellavora 4y ago
    > (some European countries have floating rate mortages) s/some/most/
    - FartyMcFarter 4y ago
      I thought it's common to fix rates for a few years at least (although this won't necessarily protect people in this case).
- jesuslop 4y ago
  BCE anounced net asset purchases in PEPP ending in march, though. What remains is to manage how to dump the balance out. https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220203~90fbe94662.en.html https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp2202...
- nabla9 4y ago
  They do different things. (1) interest rate hike cuts interests. (2) asset purchase programme cuts interest rate differences between countries. Euroarea as it is now is very non-optimal currency region (by the Mundell's definition) To fix it, Euroarea needs fiscal transfers. The US has automatic federal level stabilizers that smooth differences between states. Euroarea needs something similar in the long term. Common EU level unemployment would work well.
Proven 4y ago
ShivShankaran 4y ago
Taking bets on first country to get into crisis mode: my money is on Italy
- IfOnlyYouKnew 4y ago
  Their debt is worth 10 % less than it was a year ago in real terms, so they are arguably in a better situation now than in the past.
  - kgwgk 4y ago
    The interest rate they have to pay now when they issue 10-year bonds is more than fives times what they were paying one year ago though (3.6% vs 0.7%).
- tlamponi 4y ago
  Like I posted in another comment, the Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for some time, so I'd think they plan to use those as lever for such things, iow. the lending rates aren't the single "tunable" parameter, for better or worse. FWIW, until recently I was cautiously optimistic w.r.t. Italy, but the stunt of ex-premier Conte's M5S and Salvini's Lega driving out Draghi's (relatively) competent gov in favor of populism damped that a bit.. One of the biggest droughts in Italy's history won't help the economy either.
toyg 4y ago
Despite the obvious immediate consequences, this is not the most important Euronews of the day. This is it: https://www.reuters.com/markets/europe/ecb-unveils-new-tpi-anti-fragmentation-instrument-2022-07-21/ https://www.reuters.com/markets/europe/ecb-unveils-new-tpi-a... The TPI is another step forward towards the ECB getting real FED-like powers and centralizing debt. We live in historic times.
- mywacaday 4y ago
  Could someone explain what the impact and issues of TPI will be?
  - PaywallBuster 4y ago
    PIGS (Portugal, Italy, Greece, Spain, missing anything here?) have high debt For simplification let's say they spend 10% of their anual budget servicing debt at an average of 5% interest rate If the base interest rate rises by 50 bps, you could argue the average debt held by PIGS would eventually rise by the same amount, _at least_! So now you have 5.5% interest rates, which is a 10% increase So the anual budget used to service the debt would also increase by 10%, from 10% to 11% By buying bonds from these countries you pressure the yields down
    - spaniard89277 4y ago
      Yeah but ECB creates incentives for ballooning current expenditure. At least in Spain, the government chooses helicoptering money over investment every single time. Or prestige projects (High Speed Rail) over practical ones (freight corridors with no so fast trains for people?), higher salaries for public employees (already high compared to private economy), public pensions, etc. The only demands seems to be higher taxes every year for everyone else. No optimization, just raising and raising taxes every time. This is not sustainable. Savings and income are taking a nosedive for everyone who's not sucking into the public budget. This situation is going to explode, and it's going to be ugly, not only for us. I'm pretty worried about it, honestly. Meanwhile half the country is cheering because the government is very good at selling their narratives and cooking the stats. The reality is we're getting poorer pretty fast. Maybe germans have some fucking great plan because in 10 years they won't sell many cars here.
FartyMcFarter 4y ago
> the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. Is raising rates by 0.5% anywhere near enough to get inflation to 2%, given that inflation is currently at 8.6%? https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area https://ec.europa.eu/eurostat/statistics-explained/index.php...
- nathanaldensr 4y ago
  Not even close. The central banks of the western world are playing a very dangerous game.
- dsm4ck 4y ago
  I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.
  - lazide 4y ago
    Sounds like they’ll just end up behind the curve the whole time?
  - upupandup 4y ago
    This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises. You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics. Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before. Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.
- randomdata 4y ago
  The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.
JonathanBeuys 4y ago
the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% Can somebody explain what this means?
drumhead 4y ago
Quite a significant increase, give the impression the the Germans are getting jittery about the persistence of inflation.
daniel-cussen 4y ago
Rises? Should say raises, in English at least. Like the word "gifted." Nobody simplifies my Mandarin.
- tlamponi 4y ago
  Yeah, it definitively should! Sorry, not a native speaker, and that went under my typo radar.
  - daniel-cussen 4y ago
    That changes everything! That's what comments are for, the first purpose. If it's not intentional, great! I thought it was a native speaker trying to introduce an alteration of "raises", like with "gift", "gifted".
- antiterra 4y ago
  Transitive use of rises for an increase in price was a thing between 100 and 400 years ago, maybe your version is already simplified? Gifted as both a past tense transitive verb and an adjective has been around for hundreds of years and never stopped. So, I’m not sure what you’re on about there.
LatteLazy 4y ago
That brings the rate to 0.5% right? The interesting thing about leaving the low interest regime is that this chance is BOTH only 0.5%ppts in absolute terms AND infinite in relative terms...
altspace 4y ago
raises

138 points by tlamponi 4y ago

"The Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% respectively, with effect from 27 July 2022." The Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for now though, the latter is planned until 2024.

miohtama 4y ago
Does buying more bonds while raising interest rates means that the wealth is transferred somewhere? - Countries with broken economy like Italy win - Countries that kept their economy more viable lose - Zombie companies will keep going? - Mortage owners lose (some European countries have floating rate mortages)
- IfOnlyYouKnew 4y ago
  Italy doesn't have a "broken economy". It's a stereotype that just won't die no matter what, I guess. Their politics and everything connected to it are arguably a bit more haphazardly than what's common in countries further north. But they have a solid industrial base and have been economically stable for 30+ years.
  - toyg 4y ago
    If anything, Italy is practically the most trustworthy treasury in the world: despite the highest debt/GDP ratio in the world after Japan, they have never defaulted on debt and even resorted to effectively expropriating their own citizens overnight rather than missing payments.
    - tlamponi 4y ago
      > even resorted to effectively expropriating their own citizens overnight rather than missing payments. source on that one?
      - toyg 4y ago
        Google "Tassa patrimoniale Amato 1992". The government directly fetched 0.6% of all current account balances overnight.
        tlamponi 4y ago
        Thanks for that! The speculation against the pound and lira I heard of, but that was before my time and the retroactive tax wasn't ever thought in school, at least I'd like to think that I had remembered such things. Not sure how that would play out on todays (well, current as today Italy's last gov is no more) landscape...
      - Phurist 4y ago
        You would not be able to understand it, it's domestic.
        tlamponi 4y ago
        What do you mean by that comment? I _am_ Italian.
  - kgwgk 4y ago
    Stable is not as good as growing: https://i.redd.it/puoyn3g0fb311.jpg https://i.redd.it/puoyn3g0fb311.jpg
  - qwytw 4y ago
    > have been economically stable for 30+ years Assuming 'stable' is a synonim for stagnationg and slow decline then yes. The 90's were pretty good but there has been been almost no real growth after the Euro was introduced in 1999. It's even worse in relative terms. Back in 1995-2000 Italy's GDP per capita was around 130% of the EU average, now it's less than 100% and not that far from the more succesful Eastern European countries which joined in 2004 (around 80-85%). And these numbers only tell a part of the story since the average GDP per capita went down significancly after most ex-communist countries joined the EU between 2004 and 2007. France, Germany, UK & Italy had almost equal GDP per capita in 2000, Italy was even ahead of France and Britain during most of the 1990's and look what happened later: https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locations=IT-FR-DE-GB-EE https://data.worldbank.org/indicator/NY.GDP.PCAP.PP.CD?locat... Obiouviously Italy is still a rich country with a "strong" economy but if it stays on the same trajectory for the next few decades it will likely become one of the poorest countries in the EU.
    - petre 4y ago
      > not that far from the more succesful Eastern European countries which joined in 2004 Most of those countries aren't in the Eurozone, with the notable exceptions of Slovakia and Lithuania.
      - qwytw 4y ago
        Also Estonia, Latvia, Slovenia so the majority of countries which joined in 2004 have the Euro. If you also count Romania and Bulgaria which joined a couple of years later exactly 1/2 of the new member are in the eurozone.
- closewith 4y ago
  That famously broken 12th-largest economy and 10th-largest exporter in the world.
  - cloutchaser 4y ago
    They can be a large economy but not be able to pay their debts without German help. Which is exactly what will happen now
- tlamponi 4y ago
  > - Countries with broken economy like Italy win Check out this Twitter thread from an Austrian Economist PhD for some data points against that old and outdated stereotype: https://twitter.com/heimbergecon/status/1539486969977360384 https://twitter.com/heimbergecon/status/1539486969977360384
  - skippyboxedhero 4y ago
    That isn't news. The reason why Italy runs a trade surplus is because they are forced into running a primary surplus by deflationist policies from the German bloc. The reason private debt is relatively low is because their banks largely do not function and have turned into bailout mechanisms (and Italy had to take the step of bailing in private investors because they were unable to finance their debt, given the relatively large size of the banking sector, this basically froze their financial markets). Correct, Italy has run primary surpluses since the 90s...their debt is 150% of GDP, the conclusion is what? The other stuff is largely false...but assume it isn't, what is the explanation for Draghi's reforms? Youth unemployment is 35% (for reference, this is higher than many places in Africa). People confuse the policies that have been forced on Italy due to Germany's ordo-liberalism, and actual economic strength. Also, there is massive regional inequality within Italy. Some regions in the North are basically Germany. The companies are run by Germans, the investors are German, the population largely speak German. Those areas, it is true, do well. But if you are looking at Southern Italy, there are huge problems (and btw, anyone who is trying to tell you the opposite has an agenda, I have never seen this outside the context of "...so ordo-liberalism works, it must continue, deflationism works"...because if it is true that Italy is a basketcase, which it is then people start asking whether a fixed exchange rate is a good idea...which it isn't).
    - emanuele232 4y ago
      I agree with 3/4 of this comment, but the only region run by germans is Trentino, there are a couple regions that run on their own (Lombardia, Veneto and Piemonte). Said that, the more south you go the worse things get, and if you pass Rome the situation is tragic
- mellavora 4y ago
  > (some European countries have floating rate mortages) s/some/most/
  - FartyMcFarter 4y ago
    I thought it's common to fix rates for a few years at least (although this won't necessarily protect people in this case).
jesuslop 4y ago
BCE anounced net asset purchases in PEPP ending in march, though. What remains is to manage how to dump the balance out. https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp220203~90fbe94662.en.html https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.mp2202...
nabla9 4y ago
They do different things. (1) interest rate hike cuts interests. (2) asset purchase programme cuts interest rate differences between countries. Euroarea as it is now is very non-optimal currency region (by the Mundell's definition) To fix it, Euroarea needs fiscal transfers. The US has automatic federal level stabilizers that smooth differences between states. Euroarea needs something similar in the long term. Common EU level unemployment would work well.

Proven 4y ago

ShivShankaran 4y ago

Taking bets on first country to get into crisis mode: my money is on Italy

IfOnlyYouKnew 4y ago
Their debt is worth 10 % less than it was a year ago in real terms, so they are arguably in a better situation now than in the past.
- kgwgk 4y ago
  The interest rate they have to pay now when they issue 10-year bonds is more than fives times what they were paying one year ago though (3.6% vs 0.7%).
tlamponi 4y ago
Like I posted in another comment, the Asset purchase programme (APP) and pandemic emergency purchase programme (PEPP) will continue for some time, so I'd think they plan to use those as lever for such things, iow. the lending rates aren't the single "tunable" parameter, for better or worse. FWIW, until recently I was cautiously optimistic w.r.t. Italy, but the stunt of ex-premier Conte's M5S and Salvini's Lega driving out Draghi's (relatively) competent gov in favor of populism damped that a bit.. One of the biggest droughts in Italy's history won't help the economy either.

toyg 4y ago

Despite the obvious immediate consequences, this is not the most important Euronews of the day. This is it: https://www.reuters.com/markets/europe/ecb-unveils-new-tpi-anti-fragmentation-instrument-2022-07-21/ https://www.reuters.com/markets/europe/ecb-unveils-new-tpi-a... The TPI is another step forward towards the ECB getting real FED-like powers and centralizing debt. We live in historic times.

mywacaday 4y ago
Could someone explain what the impact and issues of TPI will be?
- PaywallBuster 4y ago
  PIGS (Portugal, Italy, Greece, Spain, missing anything here?) have high debt For simplification let's say they spend 10% of their anual budget servicing debt at an average of 5% interest rate If the base interest rate rises by 50 bps, you could argue the average debt held by PIGS would eventually rise by the same amount, _at least_! So now you have 5.5% interest rates, which is a 10% increase So the anual budget used to service the debt would also increase by 10%, from 10% to 11% By buying bonds from these countries you pressure the yields down
  - spaniard89277 4y ago
    Yeah but ECB creates incentives for ballooning current expenditure. At least in Spain, the government chooses helicoptering money over investment every single time. Or prestige projects (High Speed Rail) over practical ones (freight corridors with no so fast trains for people?), higher salaries for public employees (already high compared to private economy), public pensions, etc. The only demands seems to be higher taxes every year for everyone else. No optimization, just raising and raising taxes every time. This is not sustainable. Savings and income are taking a nosedive for everyone who's not sucking into the public budget. This situation is going to explode, and it's going to be ugly, not only for us. I'm pretty worried about it, honestly. Meanwhile half the country is cheering because the government is very good at selling their narratives and cooking the stats. The reality is we're getting poorer pretty fast. Maybe germans have some fucking great plan because in 10 years they won't sell many cars here.

FartyMcFarter 4y ago

> the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. Is raising rates by 0.5% anywhere near enough to get inflation to 2%, given that inflation is currently at 8.6%? https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Inflation_in_the_euro_area https://ec.europa.eu/eurostat/statistics-explained/index.php...

nathanaldensr 4y ago
Not even close. The central banks of the western world are playing a very dangerous game.
dsm4ck 4y ago
I believe the plan is to increase the rate in steps over time as to not shock the marketplace and also be able to see how market conditions change between steps.
- lazide 4y ago
  Sounds like they’ll just end up behind the curve the whole time?
- upupandup 4y ago
  This seems like having your cake and eating it too. Because of our unprecedented bubble caused by low interest rates, what happened was our markets got even more sensitive to rate rises. You can already see the impact of this in the real estate market. Its not pretty and i believe they will play hot potatoes until the next administration can take the blame. Don't know how it is in EU but probably similar dynamics. Nobody wants to be that guy who takes the fall for the next recession. It's going to last a long time and lot of people seem like they are poised to buy the dip again like they have before. Remember that markets falling to 40% isn't an outright meltdown but we've had it fall far past 50%, 80% was the biggest fall and that is the more likely scenario.
randomdata 4y ago
The article states that they increased rates by 0.5pp, not 0.5%, but probably not. Rule of thumb says that interest rates need to exceed the rate of inflation to see inflation come down.

JonathanBeuys 4y ago

the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 0.50%, 0.75% and 0.00% Can somebody explain what this means?

drumhead 4y ago

Quite a significant increase, give the impression the the Germans are getting jittery about the persistence of inflation.

daniel-cussen 4y ago

Rises? Should say raises, in English at least. Like the word "gifted." Nobody simplifies my Mandarin.

tlamponi 4y ago
Yeah, it definitively should! Sorry, not a native speaker, and that went under my typo radar.
- daniel-cussen 4y ago
  That changes everything! That's what comments are for, the first purpose. If it's not intentional, great! I thought it was a native speaker trying to introduce an alteration of "raises", like with "gift", "gifted".
antiterra 4y ago
Transitive use of rises for an increase in price was a thing between 100 and 400 years ago, maybe your version is already simplified? Gifted as both a past tense transitive verb and an adjective has been around for hundreds of years and never stopped. So, I’m not sure what you’re on about there.

LatteLazy 4y ago

That brings the rate to 0.5% right? The interesting thing about leaving the low interest regime is that this chance is BOTH only 0.5%ppts in absolute terms AND infinite in relative terms...

altspace 4y ago

raises