Turnaround in interest rates – ECB announces interest rate hike in July – News

  • The European Central Bank (ECB) will end its multi-billion dollar net bond purchases on July 1st.
  • It thus clears the way for the first interest rate hike in the euro area in eleven years.
  • This was decided by the Governing Council of the ECB at its external meeting in Amsterdam. In July, the ECB then plans to raise key interest rates by 25 basis points.
  • This is the first increase since 2011. For years, the ECB has been in emergency mode following the global financial crisis, the Greek sovereign debt crisis and the coronavirus pandemic.
  • Now the probability is increasing that the Swiss National Bank (SNB) will follow suit.

The historically low interest rates and bond purchases were once intended to ensure more inflation. The ECB is actually aiming for an inflation rate of two percent as the ideal value for the economy. For years, inflation was far too low from the ECB’s point of view.

In the meantime, however, the picture has changed radically, most recently the high energy prices have been additionally fueled by the war in Ukraine. Food and many raw materials as well as preliminary products for industry have also become significantly more expensive. In May, inflation in the euro area was 8.1 percent – ​​a record.

ECB forecast: weaker economic growth, higher inflation


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In its forecast presented on Thursday, the ECB expects significantly weaker economic growth and a stronger increase in consumer prices than assumed in March.

Accordingly, the rate of inflation this year will be 6.8 percent. In March, the central bank had assumed 5.1 percent and in December 3.2 percent. According to the latest ECB forecast, the economy in the euro area will grow by 2.8 percent this year (March forecast: 3.7 percent).

The turnaround in interest rates will not fundamentally change this either: “We expect that the interest rate hike in
July will have an immediate impact on inflation? The answer is no, »said ECB President Christine Lagarde on Thursday. “It’s not a step, it’s a journey.”

Critics accuse the ECB of acting far too slowly. Interest rates have already been raised significantly in the USA and Great Britain. In the euro zone, on the other hand, the key interest rate is still 0.0 percent. In addition, the so-called deposit rate remains at minus 0.5 percent. Commercial banks therefore have to pay penalty interest if they park excess funds at the ECB. The ECB could start here first. ECB President Christine Lagarde recently announced that negative interest rates should be history by the end of September.

SNB is likely to follow suit soon

Most experts assume that the SNB will let the European Central Bank (ECB) go first and then raise interest rates with a slight delay.

Exactly when that will be is a matter of debate. For example, the economists at the big bank UBS or Raiffeisen expect a first step in September. Others, such as the experts at Credit Suisse, are not forecasting the first rate hike until December.

There is hardly any expectation that the SNB will push ahead, i.e. raise interest rates as early as next Thursday’s monetary policy assessment. The reason: With such a step, the franc would become more attractive to the euro and could increase in value. As is well known, the SNB wants to avoid this because a stronger Swiss franc could again pose problems for Swiss exporters.

It is unanimously assumed that the key interest rate will be increased in small steps. It could therefore take a while before the key interest rate is back in positive territory. Credit Suisse, for example, assumes that the key interest rate will not reach the zero percent mark until the end of 2023.

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