The European Central Bank (ECB) is also responding to the strong inflation and taking countermeasures. It is gradually exiting the ultra-loose monetary policy. Rate hikes are announced for July and September.
ECB President Christine Lagarde envisages a swift turnaround in interest rates.
tsf. The European Central Bank (ECB) on Thursday Announcing the end of their voluminous securities purchases. It also paved the way for an increase in key interest rates in July for the first time in almost 11 years. In July, it intends to raise the deposit rate, which is crucial for monetary policy, by 0.25 percentage points. The key interest rate is currently zero percent. A second step is to follow in September, which, given persistently high inflation, should be even more decisive than the one in July, as ECB President Christine Lagarde explained at the media conference.
For the time being, the interest rates that banks have to pay when they outsource funds to the ECB have also not changed. Interest rates on the main refinancing operations, the marginal lending facility and the deposit rate were left at 0 percent, 0.25 percent and minus 0.5 percent, respectively. Central bank President Christine Lagarde is aiming for an end to negative interest rates in the third quarter at the latest. This means that banks will no longer have to pay penalty interest for excess liquidity they hold at the ECB. Many banks are currently passing this burden on to private customers, at least from a certain sum on the account.
As a preliminary step to the turnaround in interest rates, the ECB decided on Thursday to exit the multi-billion dollar bond purchase program APP. This currently amounts to 20 billion euros, but from July it should drop to zero.
The main reason for the central bank’s countermeasures is inflation, which rose to a record high of 8.1 percent (year-on-year) last year and is expected to increase further in the coming months. The ECB wants to help curb rapid price growth.
The central bank’s goal is price stability – in concrete terms, this means inflation of 2 percent in the medium term. An important reason for the high inflation is the sharp rise in energy prices due to the Ukraine war and the associated sanctions.
The central bankers are particularly worried about possible second-round effects such as a wage-price spiral. If wages rise too much in response to high inflation, this could push prices higher as companies use higher wages to justify further price hikes. Wages and prices then push each other up.
The ECB also published new inflation and growth forecasts for 2022 and the next two years on Thursday. For this year, they expect inflation of 6.8 percent. In March she had predicted 5.1 percent. For next year, she now expects 3.5 instead of 2.1 percent and for 2024 a value of 2.1 instead of 1.9 percent.
Other central banks such as the Federal Reserve in the USA or the Bank of England have already raised their key interest rates several times. Europe’s currency watchdogs had long maintained the assessment that rising inflation was being driven by special factors and was therefore temporary. The ECB is now trying to walk a tightrope between high inflation and increased risks for economic recovery from the lows caused by Corona and the Ukraine war.
The unjustified attack by Russia on Ukraine continues to weigh on the economy in Europe and beyond, writes the ECB in the statement. It affects trade, leads to material shortages and contributes to high energy and raw material prices.