It will be an almost historic event: This Thursday, the European Central Bank (ECB) intends to raise its key interest rates for the first time in eleven years.

On this occasion, after the meeting of the ECB Council, there will be a physical press conference with ECB President Christine Lagarde for the first time since the corona pandemic in the ECB high-rise building in Frankfurt's Ostend.

Christian Siedenbiedel

Editor in Business.

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However, only a small interest rate step is expected: In a survey of 63 economists by the Reuters news agency, all but one expected an interest rate hike of just 0.25 percentage points.

That would mean that the central bank's negative interest rate on deposits would only decrease from minus 0.5 to minus 0.25 percent.

The ECB has announced that it intends to raise interest rates "gradually", i.e. step by step.

However, there were conflicting voices from the Governing Council as to whether “gradual” necessarily meant “slowly”.

In a survey by the Bloomberg news agency, 22 out of 28 economists surveyed said that the ECB was lagging behind with its monetary policy.

Only "gradually" or also "slowly"?

In the meantime, some members of the ECB Council had suggested an increase of 0.5 percentage points in view of the sharp rise in inflation in the euro area.

The inflation rate was 8.6 percent in June.

"In view of the pronounced surge in inflation, an interest rate hike of 0.5 percentage points would be quite appropriate," emphasize the economists at DZ Bank.

"However, the monetary watchdogs agreed to a smaller interest rate hike in the June meeting."

Other ECB observers also cited the early determination that it would not be so easy to retract in terms of communication as a reason why the ECB will not raise interest rates more sharply now.

In addition, the government crisis in Italy may have strengthened the position of those on the ECB Governing Council who would prefer to proceed more slowly with interest rate hikes.

How much detail is there on the new ECB instrument?

A new monetary policy instrument is to be presented with the first interest rate hike, with which the ECB intends to intervene if the yields on government bonds of individual euro countries should get out of control.

In this case, the central bank should be able to buy government bonds from individual euro countries indefinitely if necessary.

The conditions to which these bond purchases should be attached for the respective countries were disputed until the very end.

Bundesbank President Joachim Nagel had stated that it depended on these conditions whether he would approve the instrument in the Governing Council.

Austria's head of the central bank, Robert Holzmann, had endorsed this position.

One – albeit rather soft – possibility for such conditions could be that the countries have to stick to the general budgetary recommendations of the European Union;

they should be doing that anyway.

Commerzbank economist Michael Schubert sees the ECB walking a tightrope: the more effectively it designs the new program by allowing purchases under only relaxed conditions or by intervening at low thresholds and with large volumes, the more it is walking “on thin ice from a legal point of view”. – because such steps would then come very close to prohibited monetary state financing.

In particular, the question of whether the ECB will intervene in view of the current government crisis in Italy is likely to be very sensitive.

"A self-inflicted political crisis in Italy is the textbook case of a situation where the ECB should not intervene," said economist Frederik Ducrozet of Swiss bank Pictet.

The economist Friedrich Heinemann from the ZEW research institute in Mannheim also warned of the consequences.

The central bank plans to use the new instrument if the difference between the bond yields of individual countries and those of the German government bond ("spread") is too far away or if the yield increase happens too quickly.

And only if this development has speculative causes, not if it is driven by the so-called fundamental data, i.e. has good reasons as it were.

However, Bundesbank President Nagel interjected that it was “virtually impossible” to distinguish between them in real time.

Observers therefore believe it is possible that the ECB will present the instrument on Thursday, but will still leave detailed questions unanswered.

It could also be interesting to see whether Lagarde gives any indication as to how interest rate hikes should continue.

So far it has been indicated that if the development does not change much, there could be a larger rate hike.

Most economists expect a rate hike of 0.5 percentage point in September and 0.25 percentage point each in October and December.

That would be it for this year.