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ECB hikes interest rates by 0.5% in its first rise in 11 years

·2-min read
ECB President Christine Lagarde   (AFP via Getty Images)
ECB President Christine Lagarde (AFP via Getty Images)

The European Central Bank has raised its main interest rates by a higher than expected half point piling more pressure on the Bank of England to follow suit next month.

The hike from zero to 0.5 per cent on its main refinancing rate was the first for 11 years and the biggest since 2000 from the central bank for the Eurozone, which has Christine Lagarde as its President.

All three of the ECB’s key lending rates were raised by the same amount. Many market commentators had been expecting a more cautious 25 basis point rise.

In a statement the ECB’s Governing Council that “further normalisation of interest rates will be appropriate” over the coming months with finacial markets now pricing in a further 0.6% rise in September.

It added: “The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting.

“This decision is based on the Governing Council’s updated assessment of inflation risks and the reinforced support provided by the TPI for the effective transmission of monetary policy. It will support the return of inflation to the Governing Council’s medium-term target by strengthening the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term.”

As the latest recruit to the world’s “50 club” of central bank the ECB’s decision makes it even more likely that the Bank of England will become the next member on August 4.

Hinesh Patel, portfolio manager at Quilter Investors, said:“The European Central Bank has at long last joined the rate hike club with this afternoon’s 50 basis point increase – the first ECB interest rate rise for 11 years. The move was bigger than the 25 basis points hike the ECB had previously planned, though this comes as no surprise given runaway inflation. A larger rate rise was already penned in for September should the need arise and this is now all but confirmed.

“However, the ECB is pushing on a string with rate hikes that will do little to quell what is predominantly an energy crisis. The ECB has waited far too long relative to the Fed and the Bank of England, thereby creating additional pressure on the EUR which is adding to inflationary pressure.

“The stall in industrial activity indicates that this rate hike is likely to have minimal impact. Headline inflation is now creeping into core which will be gravely concerning to the ECB, especially as costs now represent the most pressing problem for corporates in the region – particularly for the likes of Italy.”

Chris Beauchamp, chief market analyst at trading platform IG Group, said: “The ECB has put new life into the euro with its surprise 50bps rate hike, and its strong words on its new crisis-fighting mechanism are designed to add to the sense that the central bank is serious about confronting the twin challenges that it faces.

“The bank’s record on raising rates is hardly encouraging, but with inflation running so hot this is a clear statement of intent that has markets scrambling to price in a more hawkish policy in the months to come.”

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