- It promises a 25 bp July rate hike
- He says it will rise again in September and a bigger move is possible
- Inflation rises, rises
- Lagarde press conference at 12.30 GMT
FRANKFURT / AMSTERDAM, June 9 (Reuters) – The European Central Bank on Thursday put an end to a long-term stimulus plan and said it would offer its first interest rate hike since 2011 next month. of a potentially larger move in September.
With inflation at a record 8.1% and still rising, the ECB now fears that price growth will widen and that it could turn into a hard-to-break wage-price spiral, stubbornly heralding a new era of prices. higher.
The central bank of the 19 countries using the euro said it would end quantitative easing on July 1, then raise interest rates by 25 basis points on July 21. It will then rise again on September 8 and make a bigger move, unless the inflation outlook improves in the meantime.
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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,” he said of the moves noted Thursday.
The rapid rise in price was initially driven by energy and food prices as economies emerged from the blockade of COVID-19, but the invasion of Ukraine by Russia has accelerated these trends and growth. of prices is so widespread that even core inflation runs at twice the pace of the ECB’s target. .
The size of interest rate hikes to curb price growth has been hotly debated by ECB policymakers, with chief economist Philip Lane preferring 25-point moves in July and September, but others argue that they should be considered 50 pb.
In support of its argument, the ECB once again raised its inflation projections, and now expects inflation of 6.8% this year compared to a previous forecast of 5.1%. In 2023, it sees inflation of 3.5% and 2024 of 2.1%, which indicates four consecutive years of overcoming inflation.
That’s too high, Lagarde argued, and said a repeat of those projections in three months would require faster rate hikes.
“If you’re at 2.1% in 2024 or beyond, then the increase in adjustment will be higher? The answer is yes,” Lagarde said.
An increase of 50 basis points, the next logical increase, would be the largest one-off increase in the ECB’s rate since June 2000. At less than 0.5%, the ECB’s deposit rate has been in negative territory since of 2014.
BEHIND THE CURVE?
“Given the ECB’s warning signals, we now expect the central bank to continue the 25 basis point rise in July with movements of 50 basis points in both September and October,” Nordea said in a statement. note to customers.
“After that, the central bank is likely to slow down, up 25 basis points in December.”
Markets moved in price by 144 basis points of rate hikes at the end of this year after the statement, an increase from the previous 138 bp, or an increase at each July meeting, with several of these movements above 25 basis points.
They also anticipate a combination of 240 basis points of moves in the deposit rate by the end of 2023, bringing the maximum interest rate close to 2%.
Reuters Graphics Reuters Graphics
“I think in times of great uncertainty, gradualism is probably appropriate, rather than if the path is clear, well-identified and we all understand where we’re going,” said Lagarde, who said a few months ago that a rise of this kind year. it was very unlikely.
Some economists have argued that the ECB has come too late to address inflation, so it will not be enough to raise rates to neutral, where it does not stimulate or slow down the economy.
“The ECB stays behind the curve,” said Commerzbank chief economist Jörg Krämer.
“It’s not enough to get your foot off the gas, you also have to step on the brakes,” Krämer said. “But that’s exactly what he’s not willing to do, and that’s why we expect inflation to average well above 2% in the coming years.”
The ECB’s first rate hike in more than a decade will still leave it behind most of its global counterparts, such as the US Federal Reserve and the Bank of England, which have been rising aggressively and promising. even more actions.
Unlike the Fed, the ECB also has no plans to reduce its balance sheet with policymakers reaffirming its commitment to continue reinvesting cash with a maturity of the ECB’s € 5 trillion in public and private debt.
While promising interest rate hikes, Lagarde pledged not to allow financial markets to raise the debt costs of former eurozone debt crisis countries again. “We’re engaged, committed!” said Lagarde.
ECB interest rate and balance sheet
Although the beginning of the tightening of politics has now been established, the end point remains uncertain.
Lagarde said rates should move to a neutral point where the ECB does not simulate or slow growth. But this level is not defined and is not observable, so investors can guess how far the ECB wants to go. Read more
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Additional report by Francesco Canepa in Frankfurt and Marc Jones in London; Edited by Catherine Evans and Emelia Sithole-Matarise
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