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European stocks rally after ECB leaves interest rates unchanged

European stocks
European Central Bank president Christine Lagarde. European stocks were rallied on Thursday after the ECB’s interest rates meeting. Photo: Frederick Florin/AFP via Getty Images

European stocks rallied on Thursday after the European Central Bank held its key interest rate at 0% as the eurozone's economic outlook darkens, and as the war in Ukraine drags on.

The FTSE 100 (^FTSE) rose 0.4% ahead of the long weekend. France’s CAC (^FCHI) shot up 0.8% and the DAX (^GDAXI) rose 0.6% in Frankfurt.

The ECB left its marginal lending facility at 0.25% and its bank deposit rate at negative 0.5%, adding that rates will remain at record lows and won't rise until projections show inflation sustainably at 2%.

The central bank's decision breaks with the emerging central bank consensus around the world that rates need to rise to cool inflation. The bloc's inflation hit 7.5% in March and is expected to move higher.

It announced it will end its bond buying programme in the third quarter, and plans to buy €40bn ($43bn, £33bn) of bonds this month, falling to €30bn in May and €20bn in June.

"In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy," the ECB said. "The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability."

Read more: UK inflation hits 30-year high of 7% as cost of living crisis deepens

"The ECB has decided not to follow fashion and has kept its hawks firmly under control," said Chris Beauchamp, chief market analyst at online trading platform IG. "While the US and UK go for more rate rises the ECB argues that no rush is necessary, with rate rises coming ‘some time’ after asset purchases end."

"This widening policy gap could be the break European markets are looking for, and certainly provides welcome relief from the negativity that has prevailed for most of the month."

Oil prices retreated as the volatile market weighs a larger-than-expected build in US crude stocks against tightening global supply.

Brent crude (BZ=F) dipped 1% to $107.70 a barrel. US light crude (CL=F) was 1% lower to $103.22 in electronic trading on the New York Mercantile Exchange at the time of writing.

Across the pond, US benchmarks were mixed as earnings season kicked off, with the first reports from major firms rolling in amid the highest inflation in four decades.

Wall Street’s S&P 500 (^GSPC) declined 11.98 points, or 0.3%, to 4434.61. The tech-heavy Nasdaq (^IXIC) fell 1%. The Dow Jones (^DJI) added 0.4% at London's close.

The yield on the benchmark 10-year Treasury note dipped to 2.68% from 2.72% on Tuesday, extending its decline into a second day. Yields fall when prices rise.

Overseas markets tracked a bounce on Wall Street overnight, ending a three-day losing streak. The MSCI’s broadest index of Asia-Pacific (AAXJ) shares excluding Japan was up 1.6%.

The Nikkei (^N225) rose 1.2% in Japan, while the Hang Seng (^HSI) edged 0.5% higher in Hong Kong and the Shanghai Composite (000001.SS) gained 1.5%.

South Korean shares were the exception, declining after its central bank unexpectedly raised its policy rate by 25bps to 1.50%, the highest since August 2019 in a bid to tame surging inflation. The KOSPI index (^KS200) fell 0.4%.

Asian markets, including Hong Kong, Singapore and Australia are closed on Friday for Easter holiday, as are major benchmarks in the UK, EU and the US.

Watch: How does inflation affect interest rates?