European Central Bank surprises markets with larger-than-expected rate hike, its first in 11 years

The European Central Bank is increasing interest rates for the first time in 11 years. But in Italy, political turmoil is back.

The euro zone's rampant inflation caused the European Central Bank to increase interest rates for the first time in over a decade.

The central bank of the 19 nations that share the euro currency surprised the market by raising its benchmark rate by 50 basis points. The increase was expected to be 25 basis points.

The Governing Council of the European Central Bank decided that it was appropriate to take a larger first step on the path of normalising policy rates.

The institution kept rates at historic lows as it dealt with the debt crisis and the coronaviruses.

The euro rose to a session high after the rate hike was announced. The yield on the 10-year Italian bond jumped as a result of the resignation of the prime minister.

Hiking rates by 50 basis points and softening forward guidance shows that the ECB thinks the window for a series of rate hikes is closing quickly.

The return of inflation will be supported by the anchoring of inflation expectations and by ensuring that demand conditions adjust to deliver its inflation target in the medium term, according to the European Central Bank. The inflation target is 2%.

The European Central Bank had previously said it would increase rates in July and September, but it was not clear if it would bring rates back to zero. The marginal lending facility is 0.05% and the deposit rate is zero.

According to Seema Shah, chief strategist at Principal Global Investors, the European Central Bank is not tightening its policy against a backdrop of strong economic growth.

She said that the European Central Bank is hiking into a drastically slowing economy, facing a severe stagflationary shock that is beyond its control, as well as facing an Italian political crisis which presents a difficult risk dilemma.

The Bank hiked interest rates for the first time since 2011. The window for a series of rate hikes is closing quickly, as shown by hiking rates by 50 basis points.

The June inflation reading was a record high. Some investors are skeptical about the actions of the European Central Bank. In June, the European Central Bank predicted an inflation rate of 6.8% for the whole of this year and 3.5% in the years to come. The central bank predicts a GDP rate of 2% for this year and 2% for the next.

Russia may cut supplies of natural gas to Europe completely. Moscow has been accused of weaponizing fossil fuels as the EU slaps tough sanctions on the Kremlin.

Since June, natural gas flows have fallen by about 60 percent and the critical Nord Stream 1 had to be shut down.

Europe's Economics Commissioner Paolo Gentiloni believes that a full cut-off in supplies from Moscow could push the euro zone into a recession this year.

On Thursday, investors kept a close eye on the details of the new anti-fragmentation tool of the European Central Bank.

The TPI was called by the central bank. It can be used to counter disorderly market dynamics that pose a serious threat to monetary policy.

The scale of TPI purchases depends on the risk of policy transmission. The time is in London.

Expectations point to some conditionality between implementing strict domestic reforms and being able to use this instrument. This is important in the context of Italian politics, where snap elections are expected to take place in the fall.

If the government sticks to its targets, it will benefit from the new tool.