After holding out as much as possible, the European Central Bank (ECB) has caved in and increased its interest rates in an attempt to tame the surging inflation. The 50 basis points increase is the first since 2011 and the biggest since the early 2000s.
ECB’s decision to set its benchmark deposit rate by 50 basis points to zero% caught traders off guard, considering the move is much more aggressive than expected. The previous thinking was that the hike wouldn’t be above 25 basis points.
For the past eight years, the ECB, which is responsible for the economic and monetary policy of the European Union, has made an effort to keep its borrowing rates in the negative. However, this proved as an unsustainable policy in these times of challenging economy, and ECB went with an aggressive approach that also included lifting the refinancing rate to 0.50%. More hikes should follow as well, even as soon as September.
“Inflation continues to be undesirably high and is expected to remain above our target for some time,” Christine Lagarde, President of ECB, told reporters on Thursday.
The announcement had a positive effect on Euro, sending it to $1.02 on Thursday. This comes after the currency almost hit parity with the US dollar last week.