ECB Hikes Interest Rates To Highest In 22 Years: Lagarde's Dovish Tone Propels European Stocks To Levels Unseen Since 2007

The European Central Bank hiked its key interest rates by 25 basis points on Thursday, in a unanimous decision, delivering the ninth consecutive rate hike over the past year, a day after the Federal Reserve also hiked borrowing costs.

The ECB deposit rate – the interest rate that the central bank pays to banks for depositing excess funds overnight – rose to 3.75%, the highest level since April 2001. The interest rate on main refinancing operations rose to 4.25%, the highest since October 2008.

In addition, the ECB decided to cut the remuneration on minimum bank reserves to 0%. This means that banks will no longer be paid for the money they are required to keep at the ECB.

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Chart: ECB Hikes Rates To The Highest In Over 22 Years

ECB Is Now Data Dependent, Lagarde Says

“Inflation continues to decline but is still expected to remain too high for too long,” the ECB wrote in the July statement.

In her opening remarks, ECB Governor Christine Lagarde emphasized the commitment to set interest rates at a sufficiently restrictive level until the 2% inflation target is achieved.

She acknowledged that the economy is expected to remain weak in the short term, and banks are facing higher funding costs, leading to less favorable lending conditions.

The ECB refrained from making firm commitments to future rate hikes, and Lagarde did not specifically use the phrase “we have more ground to cover,” used in prior meetings. She emphasized that the ECB is now adopting a data-dependent approach for future decisions.

“We are not going to cut, it can be a hike or a pause,” Lagarde said, responding to a question about how the ECB could move in September.

Euro Sinks, European Stock Market Jumps To 2008 Highs

The euro fell in reaction to the ECB meeting, with the EUR/USD pair losing 0.7% on the day to 1.10. The Invesco CurrencyShares Euro Currency Trust FXE, a currency ETF that tracks the performance of the single currency, was 0.8% lower.

Despite the drop in the single currency, European stocks managed to rise to their highest level since late December 2007, with the Euro Stoxx 50 Index rising to 4,445 points, up 2.1% on the day.

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