- Promises interest rate increase in July by 25 bps
- He says it will rise again in September and more traffic is possible
- Inflation is rising, expanding
- Lagarde’s press conference at 12:30 GMT
FRANKFURT / AMSTERDAM, June 9 (Reuters) – The European Central Bank ended a long-running stimulus scheme on Thursday and said it would carry out its first interest rate hike since 2011 next month, followed by a potentially larger move in September.
With record high 8.1% inflation and still rising, the ECB now fears that price growth is widening and could turn into a hard-to-break spiral in wages and prices, heralding a new era of persistently higher prices.
The central bank for the 19 countries using the euro has said it will end quantitative easing on July 1st, then raise interest rates by 25 basis points on July 21st. It will then rise again on September 8 and take a bigger step, unless in the meantime the inflation outlook improves.
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“We will make sure that inflation returns to our 2% target in the medium term,” ECB President Christine Lagarde told a news conference. “It’s not just a step, it’s a journey,” she said of the moves signaled on Thursday.
The rapid rise in prices was initially caused by energy and food prices as economies emerged from the blockade of COVID-19, but Russia’s invasion of Ukraine has accelerated these trends and rising prices are so widespread that even core inflation has doubled. higher than the ECB’s target.
The rate of interest rate hikes has been hotly debated by ECB politicians, with chief economist Philip Lane preferring 25 basis points in July and September, but others say 50 basis points should be taken into account.
In support of their thesis, the ECB has again raised its inflation forecast, now expecting inflation to be 6.8% this year compared to the previous forecast of 5.1%. In 2023, inflation is 3.5%, and in 2024 2.1%, which shows four consecutive years of exceeding inflation.
This is too high, Lagarde argued, and said that repeating these forecasts in three months would require a faster rise in interest rates.
“If you are at 2.1% in 2024 or beyond, then the increase in the correction will be higher? The answer is yes,” Lagarde said.
An increase of 50 basis points, the logical next increase, would be the largest one-off increase in the ECB’s interest rate since June 2000. At minus 0.5%, the interest rate on ECB deposits has been in negative territory since 2014.
BEHIND THE CURVE?
“Given the hawks’ signals from the ECB, we now expect the central bank to follow the 25-point interest rate hike in July by 50 basis points in September and October,” Nordea said in a note to customers.
“After that, the central bank will probably slow down, increasing by 25 basis points in December.
Markets moved to the price by 144 basis points from interest rate increases until the end of this year after the statement, compared to 138 basis points earlier or an increase in each meeting in July, some of which exceeded 25 basis points.
They also expect a combined 240 basis points changes in the interest rate on deposits by the end of 2023, which will put the interest rate peak close to 2%.
Reuters Graphics Reuters Graphics
“I think in times of great uncertainty, gradualism is probably appropriate, more so than if the road is clear, well-identified and we all understand where we are going,” said Lagarde, who said months ago that raising interest rates this year was a lot. unlikely.
Some economists have argued that it is too late for the ECB to tackle inflation, so raising interest rates to a neutral level where it neither stimulates nor holds back the economy will not be enough.
“The ECB remains behind the curve,” said Jörg Kremer, Commerzbank’s chief economist.
“It’s not enough to just take your foot off the gas, you have to step on the brakes,” Kramer said. “But that’s exactly what he’s not ready to do, so we expect inflation to be above 2% on average in the coming years.”
The ECB’s first rate hike in more than a decade will still leave it behind most of its global rivals, including the US Federal Reserve and the Bank of England, which are growing aggressively and promising even more action.
Unlike the Fed, the ECB also has no plans to reduce its balance sheet, with politicians reaffirming their commitment to continue reinvesting € 5 trillion in public and private debt held by the ECB.
Although he promised to raise interest rates, Lagarde promised not to allow borrowing costs from countries in the former eurozone debt crisis to be pushed wildly higher than financial markets. “We are devoted, devoted!” said Lagarde.
ECB interest rates and balance sheet
While the beginning of the policy tightening has already been determined, the end point remains uncertain.
Lagarde said interest rates should move to a neutral point where the ECB neither simulates nor holds back growth. But this level is undefined and unobservable, leaving investors to guess how far the ECB wants to go. Read more
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Additional reports by Francesco Canepa in Frankfurt and Mark Jones in London; Edited by Catherine Evans and Emelia Sitole-Mataris
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