ECB finally hikes rates, and goes big

STORY: The European Central Bank has finally raised rates.

And it surprised markets Thursday (July 21) with a bigger-than-forecast increase.

The benchmark rate goes up by half a percentage point, or twice what had been expected.

That was the ECB's first increase in 11 years, and follows moves by other major central banks.

President Christine Lagarde says soaring inflation left no option:

“The most precious good that we can deliver and that we have to deliver is price stability so we have to bring inflation down to 2% in the medium term. That is the imperative under the treaty, that is the strategy review objective that we have set for ourselves and it’s time to deliver.”

The ECB has also promised further hikes, perhaps as soon as its next meeting in September.

Thursday’s news saw a sharp market reaction.

The euro - which has recently been at two-decade lows versus the dollar - gained around half a percent.

Government bond yields and bank shares also jumped.

Speaking before the news, ING bank’s Carsten Brzeski said the ECB had to go big:

“When you look at the current situation, inflation rates are overshooting over the last months, or actually over the last year, the looming recession in September: the window for the ECB to act and to act swiftly is closing very quickly.”

Thursday’s move still leaves the ECB lagging its peers.

The U.S. Federal Reserve last month lifted rates by three quarters of a percentage point, and signalled more to come.

But the euro zone is more exposed to war in Ukraine, and a possible gas supply crisis.

That leaves policymakers with a tough task: how to battle inflation, without sparking a recession.

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