European equities dropped and eurozone government bonds sold off as the bloc’s central bank outlined plans to raise interest rates in the face of record-high inflation.
The regional Stoxx 600 share index extended losses from earlier in the day to trade 0.8 per cent lower. Germany’s Xetra Dax lost 0.8 per cent and a FTSE index of Italian stocks fell 1 per cent.
The European Central Bank said in a monetary policy statement that it would lift its main deposit rate from minus 0.5 per cent by a quarter point in July and by another unspecified amount in September.
“If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,” the ECB said.
The central bank, which has also bought up vast quantities of eurozone government bonds in recent years to lower financing costs, also confirmed it would end net purchases under its asset purchase program from July 1.
Germany’s 10-year Bund yield, which sets borrowing costs in the eurozone, rose 0.08 percentage points to 1.42 per cent, hitting a new eight-year high. Italy’s equivalent debt yield raced 0.12 percentage points higher to 3.58 per cent, having tripled since the start of the year.
“It’s the end of an era of fighting deflation in Europe and breaking one monetary taboo after another,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.
“We are coming back from negative rates and away from a world where everything has been unconventional and exceptional. It’s a big change.”
“They’ve taken an unprecedented step away from their usual policies,” said Hetal Mehta, senior European economist at Legal & General Investment Management.
She added that markets had been well prepared for the change by the ECB. “This is not a disorderly panic,” she said, given that recent statements by the bank’s president Christine Lagarde on normalizing monetary policy had been “quite explicit”.
The gap between Italy and Germany’s borrowing costs, as expressed by the nation’s 10-year bond yields, stood at 2.25 percentage points after the monetary policy statement, from 2.09 percentage points beforehand.
The eurozone central bank is tightening monetary policy as part of a global shift to higher borrowing costs to battle soaring inflation.
US data on Friday are expected to show the annual pace of consumer price rises in the world’s largest economy held at above 8 per cent in May.
Futures trading implied Wall Street stocks would rise on Thursday, however, with tracking contracts the blue-chip S&P 500 index adding 0.2 per cent.
The 10-year US Treasury yield, which moves inversely to the price of the benchmark debt security, was steady at just over 3 per cent, reflecting money market interest bets on the Fed lifting its main rate above this level next year.
In Asia, a broad FTSE index of equities outside Japan fell 0.4 per cent, while the Nikkei 225 in Tokyo closed flat.
The yen touched a new 20-year low against the dollar of ¥134.55 before settling back to ¥133.84.
Traders are betting against the Japanese currency after Bank of Japan governor Haruhiko Kuroda vowed to support the economy with “powerful” monetary stimulus and, in claims that he later withdrew, said consumers were “tolerant” of rising prices.
Brent crude, the oil benchmark, edged 0.1 per cent lower to $123.69 a barrel, having advanced more than 50 per cent so far this year.