The central bank raised interest rates by twice as much as it had said it would just last month, ending eight years of negative interest rates by taking the deposit rate to zero. Christine Lagarde, the president of the ECB, said on Thursday afternoon that it was “time to pay” after eurozone inflation hit a new record high of 8.6% in the year to June, four times the central bank’s 2% target. . Policymakers simultaneously agreed a new bond-buying program aimed at tackling a rampant rise in borrowing costs for the region’s most vulnerable governments. “The ECB is capable of going a long way,” Lagarde said, later adding: “We would prefer not to use [the new programme]but if we need to use it, we will not hesitate.” The ECB has had to walk a narrow path between responding to inflation and avoiding dragging the region into recession. The bloc has already been hit by rising energy and food prices following Russia’s invasion of Ukraine, slowing business activity and falling consumer confidence to record lows. The ECB’s decision came a few hours after Mario Draghi resigned as Italian prime minister. His planned retirement is expected to trigger a snap election this year. Krishna Guha, head of central bank policy and strategy at US investment bank Evercore, said before Thursday’s decision: “The combination of a giant disinflationary shock from weaponized Russian gas and a political crisis in Italy is about as close to a perfect storm as imaginable for the ECB”. The ECB has been slower than most central banks to respond to rising inflation and is lagging behind the U.S. Federal Reserve, which next week is expected to raise interest rates by at least 75 basis points, a similar move last month. The euro initially rallied after the ECB announcement, but later pared its gains against the dollar to trade at $1.019. Carsten Brzeski, head of macroeconomic research at Dutch bank ING, said investors are absorbing the possibility that the ECB will raise interest rates less than expected in the future after it “weakened its guidance from before” by moving to a “closer meeting to meeting interest rate decisions’. Lagarde said discussions at the bank’s board had evolved around a trade-off between the need to tackle inflationary pressures with a bolder rise in interest rates as she plotted a new bond-buying plan that would prevent the eurozone’s margins from widening for reasons other than those justified. based on financial figures. The size of bond purchases under the new program, the “transmission protection instrument,” or TPI, was not “capped.” Lagarde said. It aimed to ensure that the central bank’s monetary policy had the desired impact across the eurozone. While support for the program was unanimous, there was only “consensus” on the scale of the rate increase. The political turmoil in Rome has raised concerns about how rising interest rates will affect the sustainability of Italy’s public debt at 150 percent of gross domestic product.

Italian debt sold off on Thursday, with the yield on the country’s 10-year government bond jumping 0.24 percentage points to 3.6%, as Draghi’s national unity coalition fell apart and the ECB raised interest rates. The fall in Rome bond prices meant the gap between benchmark Italian and German yields – a closely watched gauge of market pressure – rose to 2.3 percentage points, reflecting a widening of about 0.3 percentage points to just two days. The last time the ECB raised interest rates, under then-president Jean-Claude Trichet, it was forced to reverse the move a few months later as the eurozone was mired in a sovereign debt crisis. The central bank said interest rates would rise further at future meetings, adding: “Today’s front-loading of the exit from negative interest rates allows the board to make a transition to a meeting-by-meeting approach to rate decisions.” Lagarde said there were still “upside risks” to inflation – signaling the possibility that price pressures will remain stronger than the ECB’s forecasts suggest. The ECB’s main refinancing rate was raised from zero to 0.5 percent and the marginal lending facility rate was raised from 0.25 percent to 0.75 percent. The last time it raised interest rates by half a percentage point was in June 2000, just over a year after the euro was launched.