European Central Bank hikes rates for first time in 11 years as inflation spikes

European Central Bank hikes rates for first time in 11 years as inflation spikes


FRANKFURT, Germany — The European Central Bank’s Governing Council on Thursday is expected to have deep and candid conversations about the size of its first rate hike in 11 years, with the cost of living remaining stubbornly high in the region.

The euro climbed to almost a two-week high and euro zone government bond yields jumped on Tuesday morning after Reuters reported, citing a source, that the ECB will weigh up whether to opt for a 50 basis point hike as opposed to the 25 basis points already penciled in.

“It is possible that the ECB wants the option of a 50bp hike because of something its has seen in the unpublished inflation expectations data,” said Mark Wall and his team at Deutsche Bank Research in a recent note.

“It is possible also that the option of a 50bp hike helps in negotiating the details of a strong anti-fragmentation tool,” he added, mentioning the new stimulus plan that is due to be launched Thursday that would target surging debt yields in peripheral nations such as Italy.

Details of this new anti-fragmentation tool will be closely watched and come at a critical moment as Italy faces another severe political crisis.

“While ECB President Lagarde is likely to stress the temporary nature of the instrument, owing to the exceptional circumstances the euro area finds itself in, she will also underline the ECB’s determination to secure the integrity of the monetary union, thereby trying to evoke a ‘whatever it takes’ spirit,” said Dirk Schumacher of Natixis in a research note.