The European Central Bank has said it will stop buying billions of euros of bonds in early July and raise interest rates by a quarter of a percentage point for the first time in more than a decade at its meeting a few weeks later.
The announcement, made after the ECB governing council met in Amsterdam, is a major step towards ending the ultra-loose monetary policies of negative interest rates and massive bond purchases that it has pursued over the past eight years.
The ECB said: “High inflation is a major challenge for all of us. The governing council will make sure that inflation returns to its 2 per cent target over the medium term.”
The bank last raised rates in 2011 and its deposit rate now stands at minus 0.5 per cent. There is broad agreement among the ECB’s 25 governing council members on the need to raise rates to tackle eurozone inflation that has risen at a record rate of 8.1 per cent in the year to May, more than quadruple its target of 2 per cent.
However, there is less consensus on the pace of tightening. ECB president Christine Lagarde and chief economist Philip Lane have signalled rate rises of a quarter of a percentage point as the benchmark for its meetings in July and September — the two that follow the June decision.
The central bank said it expected to “raise the key ECB interest rates again in September”. It added: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.”
The pace at which price pressures have intensified over recent months has left hawks calling for more aggressive moves, in line with the Federal Reserve’s strategy of raising rates by 50 basis points at a time.
With Russia’s invasion of Ukraine already driving up food and fuel prices for European consumers, there are growing fears among economists that if Russian gas supplies are cut off it could plunge the eurozone into recession.
The ECB slashed its growth forecasts and raised its projections sharply for inflation. Eurozone inflation would increase from 2.6 per cent last year to 6.8 per cent this year, before declining to 3.5 per cent next year and 2.1 per cent the following year – remaining above the 2 per cent target for the entire forecast period.
Growth would hit 2.8 per cent in 2022, 2.1 per cent in 2023 and 2.1 per cent in 2024.
In March, the central bank projected inflation would increase from 2.6 per cent last year to 5.1 per cent this year, before tailing off to 2.1 per cent next year and 1.9 per cent in two years’ time. The ECB had expected the economy to expand by 3.7 per cent in 2022, 2.8 per cent in 2023 and 1.6 per cent in 2024.
There has been speculation about how quickly the ECB could start shrinking its balance sheet by not reinvesting the proceeds of maturing bonds. The ECB said such reinvestments would continue “for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance”.
The euro was little changed after the announcement, trading at $1.073 against the dollar. Eurozone government bond prices weakened, pushing Germany’s 10-year yield up by 0.05 percentage points to 1.41 per cent.
Investors will be watching the press conference with Lagarde, which is set to begin at 1.30pm UK time, for any clues on how fast it is likely to raise interest rates and whether its rate-setters are more worried about inflation staying high or a sharp downturn in growth.
Additional reporting by Tommy Stubbington
Source: Economy - ft.com
