Euro Climbs Higher After ECB Raises Interest Rates By 50 Basis Points

© Reuters.

By Scott Kanowsky

AiVIF.com -- The EUR/USD surged on Thursday after the European Central Bank chose to raise interest rates by 50 basis points in a bid to tamp down red-hot inflation.

As of 0828 EST (1228 GMT), the common currency rose by 0.63% to $1.0241, continuing a recent rebound from parity with the dollar.

The ECB said it will raise the rate on its deposit facility, which provides the effective floor to euro money market rates, by 50 basis points to 0%, ending a nine-year experiment with negative official interest rates. The refinancing rate and the marginal lending rate will also rise by 50 basis points respectively to 0.5% and 0.75%.

The bank had said at its last meeting that it intended to raise the deposit rate by 25 basis points in July, with a larger hike possible in September depending on the progress of inflation. The annual rate of inflation in the Eurozone rose by more than expected to 8.6% in June, according to data released earlier this week by Eurostat, prompting an abrupt recalculation by the central bank.

Policymakers also flagged that further rate rises "will be appropriate," with borrowing costs set to be decided on a "meeting-by-meeting approach."

Meanwhile, a new financial tool was approved to prevent a blowout in yields on sovereign debt between stronger northern European economies and their weaker counterparts in the south of the continent. But the so-called 'Transmission Protection Instrument' is unlikely to stop long-term market rates rising in absolute terms even as it raises official ones.

The yield on the 10-year Italian bond, which is already under pressure from recent political turmoil in the country, was higher by 0.24 percentage points to 3.72% following the announcement. Its German equivalent, which is often judged as a proxy for Eurozone risk, also jumped by .09 percentage points to 1.35%. Yields tend to move inversely to prices.

Elsewhere, the pan-European STOXX 600 was trading slightly in the green, up 0.26% at 425.60.