ECB lifts interest rates to 22-year highs

The European Central Bank raised interest rates for the eighth successive time, as expected, on Thursday and signalled further policy tightening, as it battles high inflation.

MARKET REACTION:

STOCKS: European stocks were down 0.7% on the day, compared with a 0.4% drop just before the ECB decision.

BONDS: Government bond yields rose, with Germany's two-year yield last up around 14 basis points at around 3.18%, versus 3.15% just before the rate move.

FOREX: The euro edged up and was last trading at $1.0841 versus $1.0828 before the hike.

COMMENTS:

STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL, LONDON:

"It was fully expected, given that (ECB chief Christine) Lagarde had already said a couple of weeks ago that interest rates needed to be raised further to bring CPI back to target."

"The real story for me is that the outlook for inflation was revised upwards too. Yes, the revisions are small, but they do suggest that we will see further rate rises before the ECB is willing to pause."

ARNE PETIMEZAS, SENIOR ANALYST, AFS GROUP, AMSTERDAM

"Mixed statement: ECB acknowledges 'tentative' improvement in core inflation and sees proof of monetary tightening cooling economy and prices gradually. On the other hand, ECB staff raised core inflation forecasts. The latter could explain why yields extended increases post-ECB. There is no interest rate guidance in the statement, except the generic statement that the ECB will review its stance at each meeting."

"The market reaction is overblown and that yields should move off the highs. Given the positive inflation and producer price surprise and the monetary slowdown, the ECB will do one more rate hike. They can't take a third rate hike off the table though, because something close to a majority wants optionality with regards to a third hike. Hence, the hawkish market response after the Fed wake-up call."

(Reporting by the markets team; Editiing by Dhara Ranasinghe)