Jul 21, 2022 - World

Europe's central bank surprises markets with bigger-than-expected rate hike

Photo: Daniel Roland/AFP via Getty Images

The European Central Bank said on Thursday it would raise interest rates for the first time in 11 years — hiking borrowing costs by a larger-than-expected 0.5%.

Why it matters: It's one of the last major central banks to pull the trigger on raising rates. It's a new era for the eurozone after a long spell of ultra-loose monetary policy (with negative interest rates) as policymakers face record-high inflation in the bloc — and the threat of a recession.

The big picture: The euro area has been slammed by the economic fallout from Russia's invasion of Ukraine. That's complicated the ECB's battle with sharply rising costs as economic growth slows.

  • The central bank is also dealing with widening gaps between what Italy and other countries must pay to borrow money.
  • That may be further complicated as Italy is thrown into political turmoil, with Prime Minister Mario Draghi (a former leader of the ECB) poised to leave his post.

Details: To address the diverging borrowing costs, the ECB also unveiled a plan to buy up debt from countries with more vulnerable economies.

  • In a statement, policymakers also hinted further interest rate hikes are on the horizon.
  • "The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions," the statement reads.
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