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

Euro zone central bank's first rate hike in 11 years confirms that concerns about runaway inflation now trump growth considerations

The euro, government bonds yields and bank shares in the single currency bloc rose on Thursday after the European Central Bank delivered a big 50 basis point rate hike to tame inflation in its first rate increase since 2011.

The ECB raised its benchmark deposit rate to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs and ending an eight-year experiment with negative interest rates.

The euro climbed to $1.0268, about 0.7 per cent higher than the $1.0198 it was trading at ahead of the ECB’s statement.

By 1312 GMT it had given up most of those gains.

Benchmark 10-year euro area government bond yields were broadly higher, with Germany’s 10-year Bund yield up 10 basis points on the day at 1.36 per cent.

Two-year German yields, more sensitive to short-term interest rate moves, rose 14 bps to 0.76 per cent.

“The market was not by any means fully priced for this development and you can see that reflected in the very sharp rise in short-dated German yields on the back of today’s move,” said Richard McGuire, head of rates strategy at Rabobank.

The ECB had previously flagged a 25 basis point move at its July meeting, but sources told Reuters earlier this week that its Governing Council was consider the bigger 50 bps hike.

The pan-European STOXX 600 index struggled for direction, briefly falling after the ECB decision before flattening. Euro zone banks jumped 1 per cent with the ECB’s end of negative-rates seen lifting bank profits.

Money markets moved to fully price in another 50 bps rate hike in September.

New tool

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

Italian bond yields extended their rise, as investors digested the ECB’s new tool to contain strain in bonds markets.

Italian yields had risen earlier in the day following the collapse of Prime Minister Mario Draghi’s government, which raises the prospects of early elections.

Italian 10-year bond yields were last up 20 bps on the day to 3.70 per cent, having touched the highest since June 28. The closely watched spread over German bond yields was at 235 bps, having widened in early trade to almost 245 bps, its biggest in around five weeks.

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

“It is quite vague and not what markets want to hear, it would be good to have more transparency.”