The European Central Bank raised rates for the first time in 11 years

European central bank (ECB) on Thursday raised interest rates in the eurozone for the first time in 11 years as high and rising inflation became central bankers' main concern. 

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The European Central Bank normalized interest rates

The 50 basis point rate hike is more than analysts expected, the EU has been at zero interest rates since 2016. The general consensus was that the ECB would raise rates by 25 basis points, but a 50 point increase was seen as permanent in recent days more likely due to surging consumer prices in the Eurozone.

„Rada guvernérů usoudila, že je vhodné udělat první krok na cestě normalizace základních úrokových sazeb větší, než bylo signalizováno na jejím předchozím zasedání,“ she stated ECB.

ECB interest rate before Thursday's hike:

The bank also said further interest rate normalizations were likely at the upcoming Governing Council meetings.

The interest rate for the main refinancing operations and the interest rates for the marginal lending facility and the deposit facility will be increased to 0.50 %, 0.75 % and 0.00 % with effect from 27 July 2022.

Commenting ahead of the rate hike, Deutsche Bank analysts said in a note to clients cited CNBC reported that the unreleased data on inflation expectations may have alarmed ECB officials. As a result, a 50-point increase was recently on the table, they wrote.

In addition, analysts also pointed to the so-called anti-fragmentation tool, which has been the focus of ECB President Christine Lagarde recently, saying a 50-point increase would help in negotiating the details of such a tool.

"Anti-fragmentation" refers to the work the ECB is doing to prevent differences in market conditions for government bonds in the eurozone from being too large. The draft of the anti-fragmentation instrument is the subject of intensive negotiations within the 25-member ECB Governing Council.

The rate hike comes at a time when the euro zone is struggling with the worst inflation ever. Earlier this week, Eurostat published fresh data, which showed that year-on-year inflation reached 8.6 % in June. The inflation target of the ECB is 2 %. The central bank hopes inflation will reach its target in the "medium term".

And while inflation in Europe remains lower than the 9.1% inflation recorded in the US last month, US rates were raised to 1.75 % while the ECB kept its rate at zero. Reluctance to raise rates in the eurozone has led to a significant weakening of the euro against the US dollar, with parity between the two major fiat currencies achieved in July for the first time in 20 years.

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