ECB initiates turnaround on interest rate
After a long delay, the European Central Bank has announced it is raising interest rates by 0.5 percent. It has also unveiled a new crisis instrument, the TPI, designed to help heavily indebted countries through bond purchases. Commentators question whether this will staunch the double crisis of inflation and a looming recession.
An imperfect weapon
The interest rate hike was necessary, but that doesn't make it any less painful, The Irish Times writes:
“Borrowers, meanwhile, are facing higher repayments, with more rises to come. In normal times most might absorb this, but in the midst of a cost-of-living crisis many will now find it difficult. The ECB may have little choice but to increase interest rates, but it is an imperfect weapon at a time when it is supply factors - mainly higher energy costs - which are driving prices higher and not strong consumer demand.”
Italy putting trust on the line
In a bid to cushion the impact of the interest rate hike the Governing Council of the ECB has unveiled a new tool, the Transmission Protection Instrument (TPI), designed to allow targeted and unlimited bond purchases by individual countries in order to avoid excessive borrowing costs for highly indebted countries such as Italy. This will only function if these countries shoulder a certain amount of responsibility, La Stampa warns:
“The instrument is based on two components: the use of resources required to achieve a specific goal and compliance with a set of requirements. The former (solidarity) is inseparable from the latter (responsibility). The failure to understand this connection is one of the errors made by those who pulled the plug on the Draghi government.”
ECB still in a tight corner
The Frankfurter Rundschau describes the ECB's dilemma:
“Inflation is crying out for a drastic hike in interest rates; the threat of recession and Italy's return to instability call for caution. The European Central Bank has responded by doing the minimum. ... There is nothing wrong with this approach but it is doubtful whether it will be enough in both cases [raising interest rates and the TPI]. After misjudging the situation for so long, the ECB jacking up the interest rate by half a percentage point will hardly dampen inflation expectations. And the new Transmission Protection Instrument still sounds a bit too vague to make an impression on the capital markets. So nothing has changed the impression that the central bank is still being cornered by circumstances.”
Back-pedaling not inconceivable
The economic situation does not look promising, NRC Handelsblad cautions:
“It would not be the first time that the ECB had been caught out by reality. The last time the ECB raised interest rates, in 2011, it had to retract this step within a few months after Europe's economy ended up in recession. It is not unthinkable that this could happen again: the combination of rising energy and food prices in the wake of the Russian invasion of Ukraine, corporate reluctance to invest and the persistent sinking of consumer confidence to record depths does not bode well for the immediate future.”
Spain needs to reform its economy
El Mundo voices concern about about Spain's enormous public debt because now the cost of borrowing will increase too:
“We are the fourth most indebted country in the EU. ... This change of direction by the ECB will multiply the costs of financing government debt and make it more difficult for countries like Spain to access the markets. ... People who have mortgages or need to borrow will suffer as a result of this decision, and a drop in consumer spending and production is likely to follow. For all these reasons, Spain has no choice but to initiate an economic turnaround without delay.”