The European Central Bank on Thursday ended a long-running stimulus plan and said it would next month raise its first interest rate since 2011, followed by a potentially big move in September.
With inflation at a record-high 8.1% and still rising, the ECB now fears price hikes are widening and could turn into a steep pay-price spiral, ushering in a new era of stubbornly high prices. has been
The central bank of the 19 countries that use the euro said it would end quantitative easing on July 1, then raise interest rates by 25 basis points on July 21. This will be followed by a resurgence on September 8 and a major step forward, as long as the inflation outlook improves in the meantime.
“We will ensure that inflation returns to our 2% target in the medium term,” ECB President Christine Lagarde said during a news conference. “It’s not just a move, it’s a journey,” she said of the moves indicated on Thursday.
The sharp rise in price was initially driven by energy and food prices as economies emerged from COVID-19 lockdowns but Russia’s invasion Ukraine Those trends have accelerated and price increases have been so widespread that underlying inflation is also running at twice the ECB’s target.
The size of rate hikes to curb price hikes has been intensely debated by ECB policymakers, with chief economist Philip Lane preferring 25-basis-point moves in July and September, but arguing for considering another 50 bps. give.
Supporting his case, the ECB raised its inflation projections once again, now expecting inflation this year to be at 6.8%, compared to the previous forecast of 5.1%. In 2023, it sees inflation at 3.5% and 2.1% in 2024, indicating that inflation has increased over four straight years.
This is too much, Lagarde argued, adding that a quick rate hike would be needed to replicate these estimates three months from now.
“If you are at 2.1% in 2024 or beyond, will the adjustment growth be higher? The answer is yes,” Lagarde said.
The 50 basis point increase, the logical next increase, would be the ECB’s biggest one-time increase since June 2000. At minus 0.5%, the ECB’s deposit rate has been in negative territory since 2014.
behind the curve?
Nordea said in a note to customers, “Given the ECB’s bullish signals, we now expect the central bank to follow a 25 basis point hike in the July rate with a move of 50 basis points in both September and October.” “
“After that, the central bank is likely to slow down with an increase of 25 basis points in December.”
The statement was followed by an increase of 144 basis points in prices by the end of this year, from 138 bps earlier, or an increase in every meeting since July, with a move of more than 25 basis points.
They are also forecasting a combined 240 basis points move in the deposit rate by the end of 2023, putting the interest rate peak closer to 2%.
“I think in times of great uncertainty, gradualism is probably appropriate, much more so if the path is clear, well recognized and we all understand where we are going,” Lagarde said. That this year the rate has increased. was highly unlikely.
Some economists argued that the ECB had already done it too late to tackle inflation, so raising rates to neutral levels, where it is neither stimulating nor stalling the economy, would not be enough.
“The ECB remains behind the curve,” said Jörg Kramer, chief economist at Commerzbank.
“It’s not enough to just take your foot off the gas, it must also step on the brakes,” Kramer said. “But that’s exactly what it’s not prepared to do, which is why we expect inflation to average above 2% for years to come.”
The ECB’s first rate hike in more than a decade will still outpace most of its global peers, including the US Federal Reserve and the Bank of England, which are moving aggressively and promising even more action .
Unlike the Fed, the ECB also has no plans to reduce its balance sheet with policymakers, reaffirming its commitment to keeping the ECB matured from its 5 trillion euros of public and private debt.
Even as he promised a rate hike, Lagarde vowed not to allow the borrowing costs of former euro area debt crises countries to be pushed wildly higher by financial markets again. “We are committed, committed!” Lagarde said.
While the start of policy tightening is now set, the final point remains uncertain.
Lagarde has said that rates should move towards a neutral point at which the ECB is neither emulating nor stunting growth. But this level is undefined and imperceptible, allowing investors to gauge how far the ECB wants to go.
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