European Central Bank raises interest rates for first time in 11 years

theguardian.com:

The European Central Bank has raised interest rates for the first time since 2011 to tackle eurozone inflation that increased to 8.6% last month.

In a surprise move the ECB pushed its base rate up by 0.5 percentage points, after economists pencilled in a smaller 0.25 point hike.

Joining the US Federal Reserve and Bank of England in the fight against inflation, the ECB said the increase was necessary to limit the pressure on prices over the next two years.

In the run-up to the decision the euro continued to fall against the US dollar, which is expected to get a further boost next week when the Fed could increase its main interest rate by 0.75 points.

The Bank of England is also expected to press ahead with another rise in August.

ECB officials have come under pressure from German, Dutch and Austrian officials to increase borrowing costs despite concerns that debt financing costs would escalate for southern European members of the euro currency bloc.

The collapse of Italy’s government earlier today increased the cost of Rome’s borrowing and put pressure on the ECB to step up its “anti-fragmentation” programme, designed to protect countries that come under debt financing stress.

Recession concerns have helped push the euro to a 20-year low against the dollar, which adds to the ECB’s inflation-fighting task by worsening already high energy prices. Oil is among many commodities priced in dollars.

“The economic outlook is worsening by the day,” said Carsten Brzeski, chief eurozone economist at ING bank.

“At the same time, headline inflation is still increasing and in our view will only come down gradually towards the end of the year, if it comes down at all. In hindsight, the very gradual and cautious normalisation process the ECB