At 50 basis points, European Central Bank rate hike higher than expected

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The euro, government bond yields and shares of banks in the single currency bloc rose on Thursday after the European Central Bank announced a sharp 50 basis point rate hike to tame inflation during its first rate hike since 2011.

The ECB raised its benchmark deposit rate to zero percent, beating its own forecast of a 25 basis point move as it joined global peers in raising borrowing costs and ending a eight-year experience with negative interest rates.

The euro climbed to $1.0268, around 0.7% higher than the $1.0198 it was trading at before the ECB statement.

By 1:12 p.m. GMT, he had given up most of those winnings.

Benchmark 10-year eurozone government bond yields were higher overall, with the 10-year German Bund yield rising 10 basis points on the day to 1.36%.

German two-year yields, more sensitive to changes in short-term interest rates, rose 14 basis points to 0.76%.

“The market has by no means fully assessed this development and you can see this reflected in the very sharp rise in German yields in the short term following today’s decision,” said Richard McGuire, head of interest rate strategy at Rabobank.

The ECB previously signaled a 25 basis point move at its July meeting, but sources told Reuters earlier this week that its governing council was eyeing the biggest hike of 50 basis points.

The pan-European STOXX 600 index struggled to find its bearings, falling briefly after the ECB’s decision before flattening out. Eurozone banks jumped 1% as the end of negative rates by the ECB pushed up bank profits.

Money markets moved to the full valuation of another 50 basis point rate hike in September.


New tool

To cushion the impact of rising borrowing costs, the ECB also unveiled a new tool, the Transmission Protection Instrument.

Italian bond yields continued to rise as investors assimilated the ECB’s new tool to contain tensions in bond markets.

Italian yields had risen earlier in the day following the collapse of Prime Minister Mario Draghi’s government, raising the prospect of a snap election.

Italian 10-year bond yields last rose 20 basis points on the day to 3.70%, after hitting their highest level since June 28. its biggest in about five weeks.

“We also have the Transmission Protection Instrument (TPI) and that is going to be equally important in terms of market reaction,” said Marchel Alexandrovich, European economist at Saltmarsh Economics in London.

“It’s pretty vague and it’s not what the markets want to hear, it would be nice to have more transparency.”

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

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