European Central Bank marks first rate rise in over a decade with shock 50 basis point move

The European Central Bank (ECB) today marked its first interest rate rise in over a decade with a shock 50 basis point move.

The biggest inflation surge in the eurozone since the creation of the single currency in 1999 forced President Christine Lagarde and co to launch the bigger hike.

The Continent’s monetary authority has lagged far behind the Bank of England and the US Federal Reserve in reining in stimulative policy in response to price rises.

UK interest rates have risen from 0.1 per cent to a 13-year high of 1.25 per cent since December, while across the pond, the Fed has raised its main rate 150 basis points since March.

“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,” the ECB said. Lagarde committed to a 25 basis point move earlier this month.

Despite the unexpected jump, eurozone rates are now just zero per cent. However, borrowing costs are out of negative territory for the first time since 2014.

The euro, which kissed parity with the US dollar last week, jumped around 0.9 per cent on the news, but quickly fell after Lagarde’s press conference.

The monetary authority signalled more tightening is on the way. “Further normalisation of interest rates will be appropriate” in future meetings, the ECB said.

Living costs are already up 8.6 per cent, more than four times the ECB’s two per cent target, among the 19 countries that use the euro. They are expected to surge even higher and possibly tip the bloc into recession.

Today’s “rate hike will not bring down inflation in the short run,” Carsten Brzeski, global head of macro ING, said, adding another 50 basis point rise will land before the winter.

Russia’s invasion of Ukraine has propelled inflation higher by lifting energy costs, which is “having a dampening effect on the economy,” Lagarde said. 

The area is reliant on Moscow’s energy supplies to generate output, meaning it would be hit hard if Russian President Vladimir Putin turned off gas flows.

The ECB announced the much-anticipated name of a bond buying programme designed to narrow spreads on government debt.

The transmission protection instrument (TPI) will keep a lid on indebted countries’ – such as Italy and Spain – borrowing costs. 

The tool is  “not restricted,” the ECB said, adding the number of purchases will depend “on the severity of the risks facing policy transmission”.

All countries in the eurozone can access the TPI. The ECB will determine who receives the cash injection.