The European Central Bank lifted its benchmark interest rate for the first time in eleven years with a bigger-than-expected move of 50 basis points while signaling further hikes to come as the region grapples with the fastest inflation on record.
The ECB increased its benchmark refinancing rate by 50 basis points, to 0.5%, while taking its deposit facility - which have been set in negative territory since 2014 -- to 0% and its marginal lending rate to 0.75%. It also rolled-out plans to defend bond prices for indebted member states which it dubbed the Transmission Protection Instrument, or TPI.
"The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting," the ECB said. "At the Governing Council’s upcoming meetings, further normalisation of interest rates will be appropriate."
"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 ECB statement added. "The Governing Council’s future policy rate path will continue to be data-dependent and will help to deliver on its 2% inflation target over the medium term."
The euro was marked 0.65% higher from its previous levels following the ECB rate decision, pegging it at 1.0255 against the U.S. dollar after falling to parity for the first time in 20 years earlier this month.
U.S. stocks pared some of their earlier declines, as well, thanks in part to a softer dollar, with futures contracts tied to the Dow Jones Industrial Average indicating a 10 point opening bell decline and those linked to the S&P 500 priced for an 8 point gain.
The ECB said its TPI "will ensure that the monetary policy stance is transmitted smoothly across all euro area countries", given that over-borrowing, political turmoil and the prospect of a prolonged period of slower economic growth could mean its rate hikes have a bigger impact on certain member states than others.
