Euro bounces after suprise rate hike

The European bank finally hiked interest rates yesterday for the first time in 11 years which was widely expected by the market. What wasn’t expected was the size of the rate rise that was delivered instead of the 25-point hike that Analysts had been predicting which sent the Euro soaring against the US dollar.

The European Central Bank shocked markets with a bigger-than-expected interest rate rise of 50 basis points, its largest increase since 2000 despite previously guiding markets to expect a more cautious 25 basis point increase.

The ECB said the increase was necessary to tackle eurozone inflation that increased to 8.6% last month and a surge in food and fuel costs that shows no signs of easing in the next few months.

ECB Christine Lagarde noted after the interest rate decision that she expects higher prices are here to stay for the foreseeable future which led to speculation amongst market participants that more rate hikes are on the way as the year unfolds

“We expect inflation to remain undesirably high for some time, owing to continued pressures from energy and food prices, and pipeline pressures in the pricing chain.” she said.

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 party for the Euro’s rise however may be short lived when the US Federal Reserve meets next week to announce their latest interest rate decision where the consensus is that rates will be lifted by 75 basis points with an outside possibility of a 100 point rise which will ensure the US dollar once again remains well supported because of the interest rate differentials