As essentially forewarned at the December meeting, the ECB today matched market expectations and raised key interest rates by a further 50 basis points. The move lifts the deposit rate to 2.5 percent, the refi rate to 3.0 percent and the rate on the marginal lending facility to 3.25 percent, the highest levels seen since 2008. Importantly too, while supposedly having ended forward guidance last year, it also stated that due to underlying inflation pressures, it" intends to raise interest rates by another 50 basis points at its next monetary policy meeting in March".

Alongside the changes in interest rates, the bank also confirmed that passive QT will begin next month. As outlined in December, from March, the asset purchase programme (APP) portfolio will be reduced by an average €15 billion a month until the end of the second quarter of 2023 when the bank will determine the subsequent pace of decline. In addition, by the end of the year, the Governing Council (GC) will review its operational framework for steering short-term interest rates and provide information regarding the endpoint of the balance sheet normalisation process. For the pandemic emergency purchase programme (PEPP), full reinvestment will continue, as previously scheduled, until at least the end of 2024 and the reinvestment will remain flexible so as not to interfere with the desired policy stance

On the economy, the risks to both economic growth and inflation are seen more balanced than in December. However, the bank stressed the need to closely monitor wages, which are accelerating, and inflationary expectations, which were thought to be broadly stable around 2 percent.

There are no major surprises here but the clear statement of intent regarding higher interest rates next month underlines the bank's determination to get underlying inflation under control. This further enhances the significance of the core HICP measures. It also reflects the ECB's unhappiness with market pricing that sees cash rates falling towards the end of the year.

A full 50 basis points is the wide expectation for what appears to be a certain ECB rate hike.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the nineteen presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability which since July 2021 is based upon a symmetric 2 percent target for the annual inflation rate.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets now meets every six weeks. The European Central Bank had an established inflation ceiling of just less than 2 percent which was modified in July 2021 to 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. Only short-form minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.