The European Central Bank has increased its benchmark rate by 75 bps to combat rising consumer price pressures.

The move, which was expected by analysts, raises interest rates for banks at an annual cost of €1bn ($1.2bn).

Christine Lagarde, ECB President, says that, although these movements are not ‘normal’, they will continue until inflation falls below 2%.

The decision to increase interest rates by 75 basis points was unanimous, she said.

Central banks usually raise interest rates when inflation rises above its 2% target. This is because higher rates make borrowing more expensive for consumers and businesses, which tends to slow economic growth.

But there are exceptions. In 2008, the US Federal Reserve cut interest rates to near zero to help prevent an economic collapse.

The Bank of England also lowered rates in 2009 after the financial crisis hit. But since then, it has raised them three times.

European shares fell after the region’s leading index declined by 1.2 per cent.

It was the second consecutive rise in interest rates by the European Central Bank (ECB), which increased its key lending rate in July for the first since December 2008.

Despite rising concerns that the euro zone economy may be heading for another recession, the single currency bloc has seen its biggest monthly gain since mid-2011.

However, inflation is high, unemployment is low, and the currency has been falling for years.

These recent events have strengthened the argument for the ECB to raise interest rates again. It did so back in December 2015 when it increased its benchmark rate from 0% to 0.25%.

The European Central Bank announced today (19 December) that it would raise interest rates by 25 basis points on Thursday (20 December). The move was expected after the central bank raised borrowing costs last month.

As the 10-yr bund yields increased, the prices of the 2-yr bunds decreased.

Both Italy’s two-year and ten-year bonds fell sharply today, with the two- year falling by 1.9 basis point to 2.27 percent and the ten-year falling by 1.5 basis point to 3.98 percent.

The European Central Bank (ECB) has been slow to react to rising prices. Most economists expect the ECB to raise interest rates again next week, but not by quite as much as the Fed.

“The ECB joins the 75 basis points club,” says Seema Shah, Chief Global Strategist at Principal Global Investors. “It shows the magnitude of the inflation challenge facing them.”

The ECB has also revealed new forecasts showing a serious deterioration in the economic outlook and much higher inflation expectation than previously predicted.

It expects GDP to grow by between 0.9% and 1.9% annually during 2019-2024, down sharply from the previous forecast of 2.8% annualized rate of expansion during 2018-2023.

"High energy prices are cutting into consumers' income and, although there are fewer shortages now than before, they're still having an impact."

A forceful ECB rate hike could backfire by spurring further volatility in financial markets.

Despite expectations for a slowdown in economic activity, the Bank of England expects the UK economy to grow slightly faster than previously thought.

The central bank has raised its forecast for this month's annual rate of consumer price index (CPI) increase from 6.8 per cents to 8.1 per cents and for next years' CPI increase from 3.5 per cents to 5.5 per cents. It has also raised its forecast for 2024 CPI increase from 2.1 per cents to 2.3 per cents.

With the high import costs for energy, an economic landslide is heading toward Germany.

So far, the hard economic numbers in Europe have been remarkably stable. Growth has risen by an unexpectedly strong 0 percent in the second quarter, supporting the case of the hawks at the European Central Bank who want to push interest rate hikes further.