LONDON: The European Central Bank raised interest rates by more than expected on Thursday, confirming that concerns about runaway inflation trump economic growth considerations for now.
The ECB raised its benchmark deposit rate by 50 basis points to 0%, breaking its own earlier guidance for a 25 bps move as it joined global peers in jacking up borrowing costs. It was the central bank's first rate hike for 11 years.
Policymakers also unveiled their 'anti-fragmentation' tool called TPI that is designed to contain market stress in the bloc's more indebted nations.
The euro initially jumped but then erased all gains and turned lower on the day during ECB President Christine Lagarde's press conference that followed the rate decision. European stocks were volatile after the rate decision. Government bond yields climbed with 10-year German benchmark debt yields at their highest in three weeks.
KURT KNOWLSON, SENIOR PORTFOLIO MANAGER, AVIVA INVESTORS:
"After 11 years, on a reassessment of the inflation outlook the ECB decided to front load its exit from negative rates, with a 50bp hike.
"The ECB are now moving to a more continuous forecasting regime for this cycle with rate movements being determined "meeting by meeting" which could increase the chance of more and larger rate hikes in the coming months."
JULIEN LAFARGUE, CHIEF MARKET STRATEGIST, BARCLAYS PRIVATE BANK:,
"The 50 basis points was partly expected. The market wasn't fully pricing that simply because there was this uncertainty as to whether the situation in Italy would have an impact on the ECB's thinking.
"The reason why the ECB went for a 50 basis point is one to try to restore credibility. And second its also a way to reassure the market that this new tool, the transmission protection instrument tool, is giving them sufficient confidence to go by 50 basis point.
"The main concern is here by going 50 and sending the message that they might slow down in the future - they have diminish the impact of forward guidance."
JIM REID, HEAD OF GLOBAL FUNDAMENTAL CREDIT STRATEGY, DEUTSCHE BANK:
"Moving away from negative rates is a very big deal and its worth remembering that in H1 2021 rates were priced to stay negative for most of the rest of the decade so a lot has changed.
"Given the structural inflation forces were turning before covid, and continue to point in that direction after it, it’s possible we won’t see negative rates again in Europe as far as the eye can see."
STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL:
"We now see the criteria that Lagarde has laid out for accessing TPI funds. If she is serious they look a very high bar for a country such as Italy to reach."
ERIK NELSON, MACRO STRATEGIST, WELLS FARGO, NEW YORK:
"One of the biggest takeaways is that the ECB is more open-ended on their forward guidance. Previously, they suggested that they will do 50 in September and effectively 25 basis points per meeting thereafter. Now they are more open to do larger, smaller, potentially no hike or more hikes. I think what they want to do is offer themselves more flexibility and not pre-commit.