The European Central Bank on Thursday ended its bond-buying stimulus and unveiled plans for a series of interest rate hikes from July to tackle rising inflation, the first in more than a decade.
Faced with mounting pressure for policymakers to catch up with other major central banks, which have already moved to rein in prices, the eagerly awaited announcements lift the curtain on the ECB’s era of cheap money .
The ECB governor, meeting extraordinarily in Amsterdam rather than Frankfurt, agreed as a first step to halt its multi-billion-euro bond-buying stimulus from 1 July.
The bank’s governing council plans to “raise key ECB interest rates by 25 basis points” at its next meeting on July 21, the ECB said in a statement.
It will raise rates again in September with the size dependent on the economic outlook.
ECB president Christine Lagarde, who called Thursday’s decision unanimous, said the bank was embarking on “a journey” that would include “several steps over the course of the next months”.
The last time the ECB raised rates was in 2011.
With consumer prices rising, “the ECB officially ends its long era of unconventional monetary policy,” said ING Bank economist Carsten Brzewski.
Inflation in the euro area of 19 countries rose to 8.1% in May, well above the ECB’s target of 2%.
Russia’s war against Ukraine has sparked a massive surge, which has driven up energy, food and raw material costs around the world.
In updated forecasts, the ECB said it expects consumer prices to rise by 6.8% in 2022, up from 5.1% earlier.
Inflation fell to 3.5% in 2023 and fell to 2.1% in 2024.
The ECB also lowered its economic growth forecast for the 19-nation club to 2.8% in 2022 and 2.1% in 2023, from 3.7% and 2.8% previously.
The weak outlook underscores the difficult task ahead for Ms Lagarde in finding the right balance between raising borrowing costs enough to quell inflation, without jeopardizing the eurozone’s already faltering economy.
The war in Ukraine is “disrupting trade, causing material shortages, and contributing to higher energy and commodity prices,” the ECB said, while new coronavirus restrictions in China are worsening supply chain constraints. Were were
But the ECB still saw cause for optimism.
“Once the current headwinds are over, economic activity is expected to pick up again,” it said.
“Conditions remain for the economy to grow as the economy reopens, a strong labor market, financial support and savings built up during the pandemic.”
Policymakers, however, are keeping a close eye on eurozone wages, Ms Lagarde said, for fear of a “wage-price spiral”, where higher prices prompt workers to demand wage increases, in turn pushing prices higher. Proceeds.
“We are not seeing a risk of spiraling at all, but we are seeing wage increases,” Ms Lagarde said.
The end of July 1 for the ECB’s bond-buying plan will draw a line under a series of debt-buying measures totaling nearly €5 trillion ($5.4 trillion) since 2014.
The cancellation of the scheme paves the way for what Ms Lagarde has called a “raising” of rates.
The ECB has three key rates: a core refinance operating rate which is currently at zero, a marginal credit facility rate of 0.25% and a bank deposit rate of minus 0.5% – meaning lenders have to park their excess cash in the ECB. Pay.
The roadmap set by Ms Lagarde and the ECB sees the central bank exit eight years of negative rates by the end of September.
The former French finance minister kept the door open in September for a hike of more than 25 basis points that would push the deposit rate to more than zero.
The US Federal Reserve and the Bank of England have already started a rate-hiking cycle.
Asked how the bank would react if borrowing costs began to vary across the eurozone, Ms Lagarde said the ECB “will not tolerate fragmentation”.
It declined to explain what actions the bank might take, saying only that “we know how to deploy new equipment if necessary”.
The spread between the Italian and the benchmark German 10-year bond is currently at its biggest since the early stages of the pandemic.