The European Central Bank enacted its first interest rate hike in 11 years on Thursday, following the US Federal Reserve and other central banks in tightening monetary policy to combat rampant inflation.
The ECB hiked its benchmark deposit rate by a half-percentage point in a larger-than-expected increase. ECB President Christine Lagarde had pointed to a likely quarter-percentage-point hike last month.
“The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalization path than signaled at its previous meeting,” the ECB said in a statement on its decision.
The bank added that its decision was based on an “updated assessment of inflation risks.” The latest hike means Europe will exit a period of negative interest rates and loosened monetary policy that lasted for several years.
The ECB also increased its main refinancing rate to 0.50%, according to Reuters. Further hikes are expected at the bank’s next meeting in September.
“Further normalization of interest rates will be appropriate,” the ECB added. “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.”
Like the Fed and other central banks, the ECB is attempting to bring down prices through interest rate hikes without triggering an economic slowdown of recession. Inflation hit 8.6% last month in Europe – and could get worse in the months ahead as European nations contend with a potential energy crisis.
Unlike the US, European nations remain heavily reliant on Russian energy shipments even as they enact penalties on the Kremlin in response to its brutal invasion of Ukraine. While Russia restarted a key natural gas pipeline at limited capacity on Thursday after a 10-day shutdown, concerns about supply and a potential shutoff are expected to linger.
The ECB is the euro zone’s equivalent of the US Federal Reserve. The central bank dictates economic policy for 19 countries that use the euro.
The Fed enacted a three-quarter percentage point hike in June and is expected to implement another massive hike later this month in an effort to tame inflation. US consumer prices jumped 9.1% in June – the sharpest increase since 1981.