ECB hikes 0.50% and reveals new program

Source: Dukascopy Bank SA
On July 21, the European Central Bank unexpectedly hiked its base interest rate by 0.50% instead of the expected 0.25%. Moreover, the central bank stated that it intends to possible do additional rate hikes in order to normalize rates.

However, most market participants took attention to the fact that a new Transmission Protection Instrument is set to be revealed. The initial look at the instrument revealed that it appears to be a new type of emergency asset purchase fund, which would be activated in a possible financial crash.

In the meantime, the central bankers revealed that they would continue to run its APP reinvestment program.

Quoting the statement: "Today, in line with the Governing Council's strong commitment to its price stability mandate, the Governing Council took further key steps to make sure inflation returns to its 2% target over the medium term. The Governing Council decided to raise the three key ECB interest rates by 50 basis points and approved the Transmission Protection Instrument (TPI).

The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance.

The Governing Council stands ready to adjust all of its instruments within its mandate to ensure that inflation stabilises at its 2% target over the medium term. The Governing Council's new TPI will safeguard the smooth transmission of its monetary policy stance throughout the euro area."

Released Document

Monetary policy decisions

The EUR/USD currency exchange rate reacted to the news with a surge of 84 base points or 0.82% over the span of 25 minutes after the release. Afterwards, the rate remained stable near 1.0260.

On a larger scale, the pair has been recovering since reaching parity and shortly trading below the 1.0000 mark.

Initial Reaction

Larger scale situation

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