ECB raises interest rates amid soaring eurozone inflation

The European Central Bank (ECB) has raised interest rates for the first time in more than 11 years as it tries to control soaring eurozone inflation. The central bank of 19 nations that share the euro currency, the ECB raised its key interest rate by 0.5 percent or 50 basis points to zero on Thursday as against the expectation of a smaller hike of 25 basis points. The ECB said in a statement that the Governing Council judged that it is appropriate to take a larger first step on its policy rate normalisation path than signalled at its previous meeting. The rate has been negative since 2014 to encourage banks to lend rather than deposit money with the bank. Consumer prices rose at a record rate of 8.6 per cent in 12 months to June. That is well above the bank's 2 per cent target.

Central banks around the world, including the Bank of England and America's Federal Reserve, have been raising rates as price rises accelerate. Soaring energy, fuel and food costs are pushing up inflation, putting pressure on struggling families. The ECB began cutting interest rates after the 2008 financial crisis to stimulate growth and took them as low as minus 0.5 per cent during the pandemic.The ECB justified the bigger hike by an "updated assessment of inflation risks" and pledged further action possibly as soon as its next meeting in September.  The ECB said that raising the deposit rate would strengthen "the anchoring of inflation expectations." The bank's previous policy of negative deposit rates effectively penalizes banks for parking money with the ECB overnight. It was aimed to encourage more lending and, therefore, more economic activity, which can also contribute to inflation.