The European Central Bank has raised interest rates by 0.5% to combat surging inflation, which is approximately 9% across the euro area.
This is the first time in 11 years that the ECB has hiked its interest rate.
This rate will increase over time to 0.75%. The rate could reach 2.4% in 2024, but inflation is expected to fall back by then.
The hike was larger than expected, confirming that concerns about runaway inflation now trump growth considerations, even as the euro zone economy reels from the impact of Russia's war in Ukraine.
The ECB raised its benchmark deposit rate by 50 basis points to zero percent, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs.
Ending an eight-year experiment with negative interest rates, the ECB also increased its main refinancing rate to 0.50% and promised further rate hikes possibly as soon as its next meeting on September 8.
"Further normalisation of interest rates will be appropriate," the ECB said.
"The frontloading today of the exit from negative interest rates allows the Governing Council to make a transition to a meeting-by-meeting approach to interest rate decisions," the ECB said in a statement.
The ECB had for weeks guided markets to expect a 25 basis point increase but sources close to the discussion said 50 basis points was put in play shortly before the meeting as indicators pointed to a further deterioration of the inflation outlook.
With inflation already approaching double-digit territory, it is now at risk of getting entrenched above the ECB's 2% target and any gas shortage over the coming winter is likely to push prices even higher, perpetuating rapid price growth.
Economists polled by Reuters had predicted a 25 basis point increase but most said the bank should actually hike by 50 basis points, lifting its record-low minus 0.5% deposit rate to zero.
Variable rate mortgage customers are expected to be one of the key groups impacted by the rate hike.
Mortgage broker Michael Dowling of Dowling Financial gave this example to the Irish Examiner: "Taking a mortgage of €300,000 over a 30-year term, monthly mortgage repayments will rise by €220, which is very significant.
While switching activity has been busy this year to date, MyMortgages said it is expecting a flurry of activity over the coming months as people move to try to lock in fixed rates and somewhat shield themselves from further increase rate rises.
The ECB interest rate hike comes after the Federal Reserve decided to increase rates earlier this year.
The ECB delayed increasing interest rates as it considered rising inflation to be "transitory." However, the ongoing war in Ukraine has aggravated inflation across Europe.
