In its monetary policy decision on Thursday, October 27th, the European Central Bank’s Governing Council repeated its policy move from the last two meetings, raising its key interest rates by another 0.75%. Explains the Governing Council:
With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation. The Governing Council took today’s decision, and expects to raise interest rates further, to ensure the timely return of inflation to its 2% medium-term inflation target.
Inflation is of major concern, according to the ECB. The statement from their monetary policy meeting specifically mentions the 9.9% inflation rate for the euro zone in September. This rate represented an increase from the 9.1% rate in August, which puts European inflation on a different track than inflation in the American economy. In September, the U.S. Bureau of Labor Statistics reported an inflation rate of 8.2%, down from 8.3% in August and 8.5% in July.
With Thursday’s interest-rate hikes, the ECB has placed its deposit facility, which governs return on commercial-bank deposits with the central bank, at 1.5%. The rate on main bank-system refinancing operations is at 2.00%, while the marginal lending rate is at 2.25%.
In addition to combating inflation, the rate hikes are also aimed at accommodating rising par yields in the secondary market on Euro-denominated sovereign debt. Figure 1 reports the yield on ten-year treasury securities for, respectively, the euro zone and the United States.
The rise in yield on the 10-year security is representative of the trend in yields on all euro-denominated bonds, including those that do not come with AAA credit rating.