The European Central Bank on Thursday brought an end to the era of negative interest rates in the eurozone with a bigger than expected half-point hike to combat soaring inflation, as President Christine Lagarde warned of a darkening economic outlook.

Policymakers had signalled in June an intention to raise rates by a more modest 25 basis points.

But the more aggressive move, the ECB's first rate hike since 2011, reflected an updated "assessment of inflation risks", the Frankfurt institution said.

Consumer prices rose in the eurozone rose by 8.6 percent in June, an all-time high for the currency club and well above the central bank's target of two percent, partly because of surging energy costs following Russia's invasion of Ukraine.

The ECB also unveiled the first details of a new crisis tool to fight bond market stress in parts of the eurozone.

The instrument, the "Transmission Protection Instrument (TPI)", is a response to recent increases in the borrowing costs for governments in more highly indebted members, such as Italy.

The targeted bond-buying scheme "can be activated to counter unwarranted, disorderly market dynamics that pose a serious threat to the transmission of monetary policy across the euro area," the ECB said.

The ECB's hike lifts its deposit facility out of negative territory for the first time in eight years, to zero percent.

The rate on the ECB's main refinancing operations climbs to 0.50 percent and on its marginal lending facility to 0.75 percent.

Future rate hikes "will be appropriate", the ECB said, as it looks to catch up with the US Federal Reserve and the Bank of England which both started raising rates earlier and more aggressively.

The "frontloading" of the rate hikes meant the ECB could take a "meeting-by-meeting approach to interest rate decisions", it said, stressing that future moves would be "data-dependent".

With prices taking off, the euro weak against the dollar and other central banks racing ahead with bigger hikes, the ECB was under pressure to act decisively on Thursday.

In the end, the 25 members of the governing council were unanimous in backing the bold move.

The weakness of the eurozone economy, however, meant that policymakers had a fine line to tread as they sought to slow soaring prices.

"Russia's unjustified aggression towards Ukraine is an ongoing drag on growth" while driving inflation that would remain "undesirably high for some time", ECB chief Lagarde told reporters in a press conference.

Europe's dependence on Russian energy imports has eurozone members bracing for a difficult winter and planning to ration supplies if Moscow halts gas deliveries.

Together, those factors were "significantly clouding the outlook for the second half of 2022," she said.

The ECB's "historic" rate hike showed that inflation-wary members of the governing council believe the chance to raise rates again would be "washed away by the looming recession", said Carsten Brzeski, head of macro at the ING bank.

The ECB would "not hesitate" to use its new TPI crisis-fighting tool if the borrowing costs faced by governments in the eurozone begin to show an "unwarranted" divergence, Lagarde said.

The central bank was capable of "going big" to ensure the even transmission of its monetary policy throughout the euro area, she said.

But political turmoil in Rome cast a shadow over the announcement, with the resignation of former ECB president Mario Draghi as Italian prime minister on Thursday sending renewed shivers through debt markets and the spread between Italian and German bonds widened.

Lagarde declined to comment specifically on the crisis in Italy, instead stressing that the tool was designed to "address a specific risk that all euro area countries can face".

Bond purchases under the programme, were it ever to be used, were "not restricted" ahead of time but depend "on the severity of the risks facing policy transmission", the ECB said.

Besides TPI, the ECB has said it will "flexibly" reinvest maturing bonds from its portfolio to hoover up debt from more at-risk countries and ease the pressure.

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ING GROEP

TPI