The European Central Bank raised interest rates by an unprecedented 75 basis points on Thursday in an effort to tame runaway inflation.
The ECB lifted its deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.
Moves were fairly muted after the decision.
Money markets moved to price in another 49 bps of rate hikes at the ECB’s October meeting, compared to around 50 bps before the decision.
Germany’s 10-year bond yield briefly rose after the hike but was last at 1.58%, unchanged from prior to the decision.
Italian bond yields fell 1.5 bps to 3.8147. The closely watched risk premium they pay over German peers was unchanged at 225 bps.
Euro zone banks jumped after the rate decision and were up more than 1% by 1222 GMT, while the broader euro zone index wavered and was last down 0.1%.
The euro was little moved, inching up to $1.0010, having traded just below $1 just before decision.
JEREMY BATSTONE-CARR, STRATEGIST, RAYMOND JAMES
“It is likely the phone lines between Frankfurt and Brussels will have been red hot over the past few days as Europe’s fiscal and monetary policy authorities attempted to refine a joined-up approach to the latest crisis.
“Today we have seen one half of that approach, but the region’s success in responding to the emergency will depend on marrying the tightening of monetary policy with the accompanying deficit spending.
“It remains to be seen as to whether it is right to be weakening the economy through demand destruction by raising rates at all with energy security forming a destabilizing backdrop.”
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS LONDON
“I think they were moving in the direction of a 75 bps hike in the last few weeks as we had some hawkish comments.”
“It also looks like a hawkish statement too and there is an emphasis on upward revisions to inflation forecasts.
“So, they have delivered a big move in rates but it’s not enough to bring inflation down on a three-year view.”
(Reporting by London Markets team and bureaus; compiled by Alun John; editing by Jason Neely)