ECB hikes rates for first time in 11 years

The European Central Bank announced its biggest rate hike in more than 20 years on Thursday as it looks to tackle inflation, which hit a record 8.6% in June.

The Bank hiked rates by 50 basis points to 0.0% from a record low, versus expectations for a 25 basis points increase. This marked the first hike in 11 years and the biggest since 2000.

The refinancing rate was also lifted by 50bps, to 0.5%, above consensus expectations for a 25bps hike. The interest rate on the marginal lending facility rate was increased to 0.75% from 0.25%.

"The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting," the ECB said in a statement. "At the Governing Council's upcoming meetings, further normalisation of interest rates will be appropriate."

The ECB also said it will introduce a new "transmission protection instrument" which can be used to buy government bonds to counter "unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area".

Andrew Kenningham, chief Europe economist at Capital Economics, said: "The ECB’s 50bp interest rate hike was more than the consensus had anticipated but bears out recent speculation that a larger hike was on the cards.

"We think this will be the first of a series of hikes by which the ECB will raise the deposit rate to around 2.0% next year - and we also think the Bank will ultimately have to use its new asset purchase programme to avert another euro-zone crisis."

ING analyst Carsten Brzeski said: "We all know that today’s rate hike will not bring down inflation in the short run - not even on the demand side of the economy, which will react much more to the looming recession than to any ECB action. The hike, as well as potential further hikes, are all aimed at bringing down inflation expectations and to restore the ECB’s damaged reputation and credibility as an inflation fighter.

"Today’s decision shows that the ECB is more concerned about this credibility than about being predictable. This matters more than forward guidance. Today’s decision conforms with our previous view that the ECB will not be able to deliver as many rate hikes over the next 12 months as markets had priced in after the June meeting."