- 50 basis point hike surprises markets.
- The euro strengthens after this decision.
- The standard 25-point hike is broken for the first time in 11 years.
In a move not expected by the markets, the European Central Bank decided to raise interest rates more than expected on Thursday. The move comes in response to major concerns about how to put a brake on inflation, even if growth considerations are exceeded.
The rate hike by the ECB is 50 basis points, breaking the standard 25 basis point hike that had been in place.
It is the first such ECB rate hike in 11 years.
This brings to an end a long period of negative interest rates. The main refinancing rate has also been increased to 0.50%. Further hikes are not ruled out in the future, probably at the next meeting on September 8.
“Further normalization of interest rates will be appropriate,” the ECB remarked. “Today’s anticipated distribution of the exit from negative interest rates allows the Governing Council to transition to a meeting-by-meeting approach to interest rate decisions,” the ECB said in a statement.
Shortly before the meeting ECB policymakers agreed to the 50-point hike, markets had expected a 25-point increase.
Inflation is strongly asserting itself well above the 2% target set by the ECB (the same percentage also sought by the Fed in the US). There is speculation that fuel shortages will conspire against that target, keeping the inflation number up.
This decision strengthened the euro, which firmed half a point after several weeks of frequent declines.
With this confirmed rate hike, borrowing costs will become more expensive, especially for countries that have already been hit hard on this issue, such as Italy, Spain and Portugal, as investors will demand a higher premium to maintain their debt.
However, this 50 basis point hike by the ECB still leaves it behind the Fed, which raised rates by 75 basis points last month and is very likely to repeat the same number next week.