Monetary Policy  

Markets stable after sharp ECB rate rise

Markets stable after sharp ECB rate rise
(Photographer: Alex Kraus/Bloomberg)

Markets remained stable after the European Central Bank raised interest rates for the first time since 2011.

The ECB increased rates by 0.5 percentage points yesterday (July 21), bringing them out of negative territory, despite the bank signalling previously it would hike by 0.25 percentage points.

The hike is an attempt to tackle soaring inflation, which hit 8.6 per cent in the year to June, a record high.

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Hargreaves Lansdown lead equity analyst Sophie Lund-Yates, said the ECB’s decision had “very little impact” on the FTSE’s sentiment.

“There’s likely relief that the region is making moves to tackle runaway inflation, but the reality is the speed and scope of these hikes hasn’t triggered any alarms,” she said.

European markets were also stable, with the Dax dropping 0.6 per cent, the CAC 40 down 0.7 per cent and the Euro Stoxx closing down less than one per cent in trading yesterday.

However, bond markets showed higher volatility.

Italian bonds in particular saw yields rise to 0.3 per cent to 3.7 per cent as news also broke of the departure of Mario Draghi, the prime minister of Italy, who had been credited with leading the country successfully through Covid.

This meant the gap between Italian and German 10-year yields, which is seen as an indicator of market stress, rose to 2.38 per cent. 

BlackRock head of global fundamental fixed income strategy Marilyn Watson, said the announcement alongside the ECB’s rate hike was important.

“It unveiled significant changes to its monetary policy stance, raising key interest rates for the first time in over a decade and revealing a new anti-fragmentation tool. 

“Furthermore, President Lagarde noted that further interest rate hikes are to be expected and will be data dependent and meeting by meeting, effectively removing forward guidance.”

The news comes days after Bank of England governor Andrew Bailey hinted at a 50 basis point rate increase at the central bank's next policy meeting in August.

In a speech at the Mansion House dinner on July 20, Bailey said the balance of risks to inflation is “on the upside”.

“In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet.”

The rate now sits at 1.25 per cent, having been raised for a fifth time in a row last month, with three members dissenting and calling for a rise of 0.5 per cent.