European shares dip after record ECB rate hike, banks jump

European stocks edged lower on Thursday after the European Central Bank delivered its biggest-ever interest rate hike in the clearest hawkish sign yet to fight against inflation, while shares of banks surged.

The ECB raised its benchmark lending rate by 75 basis points, in a major step to fast-track the transition from the highly accommodative levels towards levels that can help normalize inflation to the central bank's 2% medium-term target.

"The ECB has joined the 75bps club," said Seema Shah, chief global strategist at Principal Global Investors.

"Today's policy rate increase, the largest in the single currency area's history, comes despite the oncoming recession and is testament to the enormity of the inflation challenge facing the central bank."

The pan-European STOXX 600 index dipped 0.1% by 1253 GMT, with banks rising 1.8% to lead sectoral gains.

The basic resources sector gained 1.3%, attempting to recover from declines of more than 2% on disappointing China trade data on Wednesday, amid worries of metals demand.

The STOXX 600 is down over 1% so far this week and is set to end its fourth week in the red.

The euro and government bond yields were broadly steady on Thursday after the ECB decision. [GVD/EUR]

With inflation hitting all-time highs and Russia turning off the taps indefinitely to the biggest natural gas pipeline to Europe, investors have taken risk off the table on worries of soaring energy prices and a cost of living crisis.

European retailers shed 2.7%, with Swedish retailer H&M and Zara-owner Inditex falling after U.S. peer American Eagle Outfitters Inc missed second-quarter profit estimates late on Wednesday.

"I would say discretionary spending would come under pressure if the interest rates start to bite into consumer's wallets together with the already high inflation, energy prices, etc.," said Bas van Geffen, quantitative analyst at Rabobank in Amsterdam.

Associated British Foods slipped 7.5%, after it warned of lower profit next year, as its Primark fashion business struggles with rising costs and surging inflation hits demand.

Finnish forestry group Stora Enso rose 1.0% after it said it had agreed to buy Dutch packaging company De Jong for an enterprise value of 1.02 billion euros ($1.02 billion).