Closing summary
The European Central Bank has raised interest rates by a bigger-than-expeced half point, taking its key deposit rate (which was negative) to 0% and hinted at further rate hikes in the coming months. It was its first rate hike in 11 years and was triggered by soaring inflation, which reached 8.6% last month, far above its 2% target.
The central bank also unveiled a new new bond purchase scheme called Transmission Protection Instrument, which is intended to cap the rise in countries’ borrowing costs (particularly those of highly-indebted nations like Spain and Italy) and limit financial fragmentation.
The euro, bond yields and European bank shares all rose on the announcement, but the shares soon gave up their gains.
Soaring inflation pushed interest payments on UK debt to a record high in June, putting the government’s budget deficit on course to reach more than £100bn this year, almost double its pre-pandemic level.
Gas has started to flow at reduced levels from Russia to Germany through the Nord Stream 1 pipeline after fears a scheduled shutdown for maintenance work would be used as a pretext to permanently close off the supply.
However, the resumption at an estimated 40% of supplies is insufficient to keep an energy crisis at bay in Europe this winter, experts said.
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European shares are drifting lower again. The UK’s FTSE 100 index is down 10 points, or 0.15%, at 7,254 while Germany’s Dax and Italy’s FTSE MiB both lost about 1% and France’s CAC slipped 0.3%. The euro is 0.4% higher versus the dollar at $1.0214.
On Wall Street, the Dow Jones is down 0.2%, while the tech-heavy Nasdaq is up 0.3% and the S&P 500 is flat.
