The ECB begins the ‘journey’ of rate hikes as it attempts to tame inflation

The European Central Bank has ended the ultra-low interest rates and emergency bond purchases that have characterized the last decade.

CB President Christine Lagarde said rates would rise 0.25 percent in July, leaving the door open for a bigger hike in September if inflation surprises on the upside.

“It’s not just a step, it’s a journey,” Ms Lagarde said of the series of steps the bank has taken since December, when it began withdrawing from emergency bond purchases.

She said the bank had been positioning itself “to move away from unconventional monetary policy” for some time.

“We are on a journey, but this is clearly an important step in that journey,” she told reporters in Amsterdam on Thursday. “We set up a sequencing. We want to be predictable on that front.”

The bank has long hinted that it would stop buying bonds “some time before” the rate hike.

However, she warned that summer rate hikes will not have an immediate impact on high prices.

Prices rose 8.1 percent in May in the 19-member euro zone, a new record, with 2021 energy prices up 39.2 percent at that point. In Ireland, inflation hit a nearly 40-year high of 8.2 percent in May.

ECB staff now estimate that price increases in the 19-member euro zone will average 6.8 percent this year before slowing to 3.5 percent in 2023 and 2.1 percent in 2024 – well above their March forecasts and slightly above the ECB’s 2 percent target.

Excluding energy and food, inflation will average 3.3 percent in 2022, 2.8 percent in 2023 and 2.3 percent in 2024, the ECB predicts.

Ms Lagarde insisted the bank would restart inflation in the medium term.

The war in Ukraine and the rapid pace of the post-Covid recovery have surprised forecasters, Ms Lagarde said.

The war has also hit eurozone growth, with the ECB forecasting GDP growth to be 2.8 percent this year and 2.1 percent in 2023 – a significant downward revision – and 2.1 percent in 2024.

Thursday’s decisions mark the first time the ECB has hiked interest rates since 2011, when it was widely perceived that the bank had acted too quickly and aggressively, keeping growth and inflation low for the decade that followed.

Ms Lagarde insisted this is not the ECB ‘catching up’ with its US and UK counterparts.

The Bank of England began raising interest rates last December and its main lending rate has been at 1 percent since May.

The US Federal Reserve began raising interest rates earlier this year, raising interest rates by half a percent in May, the largest hike in 20 years.

The ECB’s decision was unanimous, Ms. Lagarde confirmed on Thursday.

“Today’s decision shows that a compromise has been found between the doves and the hawks,” said Carsten Brzeski, Global Head of Macro at lender ING.

“The era of net asset purchases will end in three weeks, and the era of negative interest rates will end before the fall.

“Put simply, the ECB has just announced the end of a long era. However, it is far from certain whether this will also be the beginning of a new era of continuously rising interest rates.” The ECB begins the ‘journey’ of rate hikes as it attempts to tame inflation

Fry Electronics Team

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