European Central Bank Dictates New Policy to Reduce Inflation

Inflation continues to rise around the world and to contain it, the European Central Bank (ECB) introduced new policy decisions. However, experts claim that those policy decisions could affect economic growth.

“The Governing Council took further key steps to make sure inflation returns to its 2 percent target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI),” reads an ECB’s press release.

The ECB’s Governing Council deemed that taking an impetuous first step in regaining its policy rate normalization is vital. The Governing Council seeks to return inflation to its medium-term target by anchoring inflation expectations and regaining control over demand adjustments to adequately deliver its medium-term inflation target.

The Governing Council decided to raise its three ECB interest rates by 50 basis points. The interest rate on refinancing operations and the interest rates on marginal lending facility and deposit facility will be increased to 0.50 percent, 0.75 percent and 0.00 percent, respectively. The changes will come into effect on 27 July, 2022.

“The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy. The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance,” said the ECB.

In Mexico, Banxico has adjusted its interest rates to counter recent inflationary pressures. However, global investment management firm Blackrock, warned that more increases in interest rates will only affect Mexico’s economic growth. Jose Luis Ortega, Head of the Debt and Multi-asset Teams, BlackRock, said that the most recent policy decisions by central banks only affect countries’ economic growth and that as soon as inflation faces its peak in 3Q22, a change in rhetoric will come.