European Central Bank to raise interest rates for 1st time since 2011
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European Central Bank decided to raise interest rates for the first time since 2011, ending an extended period of extremely low rates that began during the global financial crisis.
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ECB Chief Christine Lagarde
The European Central Bank (ECB) plans to raise interest rates for the first time in 11 years, next month, after another hike in September, as it keeps up with other central banks around the world in pivoting from supporting the economy during the pandemic to reducing soaring inflation.
The bank made the surprise announcement following the Amsterdam meeting of the bank's 25-member monetary policy council, which concluded that inflation had become a "major challenge" and that inflationary forces had "broadened and intensified" in the 19 euro currency using countries. The bank will end its economic stimulus program and increase the rates by a quarter-point in July.
This move comes amid concerns about surging consumer prices that jumped by an annual rate of 8.1% in May, the highest since statistics began in 1997. The bank's target is 2%. The war in Ukraine has sent shock waves through the EU economy, more precisely through rising energy prices.
Today we took our latest monetary policy decisions:
— European Central Bank (@ecb) June 9, 2022
🔵We will end net purchases under our asset purchase programme as of 1 July 2022
🔵We intend to raise our interest rates by 0.25% in July and expect to increase them again in September
More here https://t.co/DaszhqakGD pic.twitter.com/0CITSD4Nza
The ECB said that it would be possible to make, in September, a more drastic, half-percentage-point increase rather than the more usual quarter-point adjustment, saying that "a larger increment will be appropriate at the September meeting" if the inflation outlook remains or deteriorates.
Andrew Kenningham, the chief Europe economist at Capital Economics noted in a Thursday research that "The bank says 'if the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting'" adding that "they expect a [0.5%] hike to be needed at that point."
"Gradual" but sustained path of further increases
Bank President Christine Lagarde said these increases might not be the last, adding that the rate-setting council anticipates "a gradual but sustained path of further increases" after September.
On May 4, the US Federal Reserve raised the key rate by a half-point and has held out the prospect of further increases. The Bank of England has since December approved rate hikes four times.
The rates, if higher, can make credit more expensive for businesses. However, in a policy statement, the bank said that the path of increases would be "gradual but sustained."
"High inflation is a major challenge for all of us," the statement added. "The governing council will make sure that inflation returns to its 2% target over the medium term."
The bank, by raising its benchmarks, can influence what financial institutions, consumers, companies, and governments have to pay to borrow the money they need. Thus, higher rates can contribute to cooling off an overheating economy.
Nonetheless, higher rates can weigh on growth, too. This is how the ECB's mission is a delicate equilibrium between quenching inflation and blunting economic activity.
The ECB slashed on Thursday its growth projection for this year to 2.8% from 3.7%.
EU inflation outlook
ECB raised its outlook for inflation, saying that price raises would average 6.8% this year, higher than its March forecast of 5.1%. It also upped the 2024 crucial forecast to 2.1% from 1.9%. This shows that the bank considers inflation as above the target for several years, a strong argument for more rate increases.
After the decision, the euro's exchange rate to the dollar jumped by almost a half-cent, to $1.076. Higher rates can higher the demand for investments denominated in a currency, raising its exchange rate. The sudden jump shows that the bank had gone further than predicted in announcing rate rises.
The ECB action that aims to attack inflation triggered concerns about higher interest rates' impact on governments with heavy debts, particularly Italy. However, the bank did not announce support measures able to help such countries, saying only it would respond flexibly in the event that some parts of the eurozone face excessive borrowing costs.
The rate hikes end an extended period of really low rates that began during the global financial crisis.
