LONDON, Sept 8 (Reuters) - The European Central Bank raised interest rates by an unprecedented 75 basis points on Thursday in an effort to tame runaway inflation.
The ECB lifted its deposit rate to 0.75% from zero and raised the main refinancing rate to 1.25%, their highest level since 2011, as inflation is becoming increasingly broad and was at risk of getting entrenched.
MARKET REACTION:
Euro zone bank stocks <.SX7E > jumped as much as 2.4% to their highest level in more than 2 weeks before paring gains and trade up 0.9% by 1312 GMT. The broader euro zone stock market wavered before turning lower, last down 1%.
The euro briefly edged up after the decision, but slid during ECB President Christine Lagarde's press conference. It was last 0.54% lower at $0.9951.
The bloc’s bond yields rose following the decision and Germany’s 10-year bond yield, the benchmark for the bloc, was up 5 bps to 1.62% by 1245 GMT, compared to around 1.58% before the decision, nearing the highest since late June.
Italian bond yields rose 2 bps to 3.88% . The closely-watched risk premium they pay over German peers tightened to 224 bps.
MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, LONDON
"I don’t think this will do much to help the euro, given the degree to which gas prices are driving the market, and the relentless nature by which the dollar continues to rally. It feels like a long shot to think that a 75bps hike will do much to control inflation, which will remain elevated, acting as a lead weight on the economy, as long as volatility in energy markets continues."
"The move to hike by 75bps feels like more of a signalling thing than anything else, given that markets had fully priced in such a move, the ECB couldn’t disappoint with a more modest hike that would loosen financial conditions."
GURPREET GILL, MACRO STRATEGIST, GOLDMAN SACHS ASSET MANAGEMENT, LONDON
"Today’s further outsized rate increase is in response to an upside surprise in recent inflation data and a more hawkish inflation outlook ahead. We agree with the ECB’s view that some of the factors driving inflation—deglobalisation, rising physical climate risks and energy supply challenges—imply higher and more persistent inflation relative to the last cycle.
The central bank appears to believe a deceleration in growth -which is projected to drop to below 1% in 2023- will be insufficient to alleviate inflation and that it is prudent to tighten policy forcefully to prevent inflation becoming more entrenched.
WILLEM SELS, GLOBAL CIO, PRIVATE BANKING AND WEALTH, HSBC, LONDON
“It is no surprise that the euro rose a bit on the announcement. But we think that the upside is not sustainable, given that the euro remains a low yielding currency compared to others, as the market also prices in a more than 50/50 chance that the Fed and the Bank of England will hike rates by 0.75 (percentage points). In addition, the rising cost of debt, the recession, Italian election and geopolitical risks are headwinds for the euro.
Bond markets and equity markets have reacted with some concern: the rate hikes will further raise borrowing costs of peripheral countries and tighten financial conditions, which may deepen the recession.”
HINESH PATEL, PORTFOLIO MANAGE, QUILTER INVESTORS, LONDON
“The ECB governing council’s decision to further increase rates is a sideshow to the increasing risks of sovereign debt sustainability. More important is the disappointing lack of news on measures to be deployed to reduce the risk of another sovereign debt crisis."
“At the margin, increasing policy rates will be a welcome boost for banks and savers who have been financially repressed, yet this cannot solve the energy crisis exacerbated by Russia’s ongoing aggression on Ukraine.
RUSS MOULD, INVESTMENT RESEARCH DIRECTOR, AJ BELL, LONDON
"Central banks across the globe have hiked rates this week and we have reached almost 247 global rate hikes this year. The ECB has been behind the curve so this .75 is them catching up."
"The question the markets are trying to answer is where this will all end? Yes, (Federal Reserve Chair Jerome) Powell has pushed back the pivot but when do you get the pause that will lead to that pivot? Central banks have spent their time getting it wrong by calling inflation transitory. Now they've changed tack. At some stage, they may go too far and the fear is they won’t change their mind again until something breaks."
CARSTEN BRZESKI, GLOBAL HEAD OF MACRO, ING, FRANKFURT
"With today’s decision, it is clear that the ECB has given up on inflation targeting and forecasting and has joined the group of central banks focusing on bringing down actual inflation. It’s not so much a new strategy based on conviction but rather a strategy based on missing alternatives. We still can’t see how monetary policy can bring down inflation that is mainly driven by (external) supply-side factors."
JEREMY BATSTONE-CARR, STRATEGIST, RAYMOND JAMES
“It is likely the phone lines between Frankfurt and Brussels will have been red hot over the past few days as Europe’s fiscal and monetary policy authorities attempted to refine a joined-up approach to the latest crisis.
"Today we have seen one half of that approach, but the region’s success in responding to the emergency will depend on marrying the tightening of monetary policy with the accompanying deficit spending.
"It remains to be seen as to whether it is right to be weakening the economy through demand destruction by raising rates at all with energy security forming a destabilising backdrop."
MARCHEL ALEXANDROVICH, EUROPEAN ECONOMIST, SALTMARSH ECONOMICS LONDON
"I think they were moving in the direction of a 75 bps hike in the last few weeks as we had some hawkish comments."
"It also looks like a hawkish statement too and there is an emphasis on upward revisions to inflation forecasts.
"So, they have delivered a big move in rates but it's not enough to bring inflation down on a three-year view."
Reporting by London Markets team and bureaus; compiled by Alun John; editing by Jason Neely and Frank Jack Daniel
Source: Reuters