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ECB goes big with 50bps rate hike

But is its first rate rise in 11 years too little, too late?

There is nothing surer than, when you think you are ahead of the game, the universe stepping in to remind you to take nothing for granted.

Such was Expert Investor’s preparedness, that we had an article ready for publication confirming the European Central Bank did what was expected and raise rates by 25 basis points.

Back to the drawing board.

On 21 July, the governing council of the ECB decided to raise its three key interest rates by 50bps. As such, and with effect from 27 July, the rates on the main refinancing operations, marginal lending facility and deposity facility will increase to 0.5%, 0.75% and 0.0%, respectively.

“The frontloading today of the exit from negative interest rates allows the [council] to make a transition to a meeting-by-meeting approach to interest rate decisions,” it said.

The future policy rate path “will continue to be data-dependent and will help to deliver on [the council’s] 2% inflation target over the medium term”, it added.

No central bank in a worse position

Seema Shah, chief strategist at Principal Global Investors, said: “The ECB’s era of negative rates has finally come to an end, and with quite a bang – but it’s not against a backdrop of strong economic growth and certainly not accompanied by celebratory smiles.

“Quite the contrary. The ECB is hiking into a drastically slowing economy, facing a severe stagflationary shock that is quite beyond its control, while also facing an Italian political crisis which presents a difficult sovereign risk dilemma. There is no other developed market central bank in a worse position than the ECB.”

Too little too late?

Hinesh Patel, portfolio manager at Quilter Investors, added: “The European Central Bank has at long last joined the rate hike club with this afternoon’s 50 basis point increase – the first ECB interest rate rise for 11 years. The move was bigger than the 25 basis points hike the ECB had previously planned, though this comes as no surprise given runaway inflation. A larger rate rise was already penned in for September should the need arise and this is now all but confirmed.

“However, the ECB is pushing on a string with rate hikes that will do little to quell what is predominantly an energy crisis. The ECB has waited far too long relative to the Fed and the Bank of England, thereby creating additional pressure on the EUR which is adding to inflationary pressure. The stall in industrial activity indicates that this rate hike is likely to have minimal impact. Headline inflation is now creeping into core which will be gravely concerning to the ECB, especially as costs now represent the most pressing problem for corporates in the region – particularly for the likes of Italy.

“Inflation is a major issue and will be for some time yet and the balancing act faced by the ECB remains a difficult one. The bloc is faced with inflationary shock combined with ongoing uncertainty driven by the war in Ukraine, but the ECB’s previous inaction means today’s rate hike could well be too little too late.”

New life in the euro

Chris Beauchamp, chief market analyst at IG Group, said: “The ECB has put new life into the euro with its surprise 50bps rate hike, and its strong words on its new crisis-fighting mechanism are designed to add to the sense that the central bank is serious about confronting the twin challenges that it faces.

“The bank’s record on raising rates is hardly encouraging, but with inflation running so hot this is a clear statement of intent that has markets scrambling to price in a more hawkish policy in the months to come.”

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