The European Central Bank on Thursday raised its key interest rates for the first time in over a decade as consumer prices in the eurozone rose at an 8.6% annual pace in June.
The ECB raised its negative benchmark deposit rate by 50 basis points to 0%, which lifts the bank's deposit facility out of negative territory for the first time in eight years.
The announcement came as a surprise as the bank had initially announced it would hike the rate by 25 basis points only.
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.
"At our upcoming meetings, further normalization of interest rates will be appropriate," said ECB chief Christine Lagarde.
"The frontloading today of the exit from negative interest rates allows us to make a transition to a meeting-by-meeting approach to our interest rate decisions," Lagarde added.
The ECB targets an inflation rate of 2% as its maximum, but had been keeping its interest rates to historic lows in a bid to encourage growth in an economy battered by several national debt crises, the COVID pandemic, and now, Russia's invasion of Ukraine.
The US Federal Reserve and the Bank of England have already taken action to curb inflation, raising interest rates earlier than the ECB.
The euro's recent plunge to two-decade lows against the US dollar also complicated inflation pressures.
Eurozone under stress
Currently, the eurozone is under enormous economic pressure, with hopes of a strong recovery from the fallout of the COVID pandemic now dashed by overstressed supply chains and Europe's energy supply in jeopardy due to Russia's war in Ukraine.
For this reason, the ECB had hesitated to raise interest rates despite the rampant inflation that calls for such a move.
The interest rate rise also comes as the national unity government in Italy, the second-most indebted eurozone state, seems on the point of collapse.
Investors are concerned about whether the country is in a position to deal with increased borrowing costs amid the political turmoil.
On a more positive note, the euro currency is rising, partly on the back of news that Russian gas is flowing to Europe again through the Nord Stream 1 pipeline after a 10-day maintenance shutdown.
You can read this article as it originally appears at Deutsche Welle here.
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