European Central Bank confirms interest rate hike plans in July, raises inflation forecasts

The European Central Bank faces a difficult balancing act, with inflation reaching record levels, while the war in Ukraine casts a shadow over growth prospects.

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The European Central Bank on Thursday confirmed its intention to raise interest rates at its policy meeting next month and downgraded its growth forecasts.

Following its last monetary policy meeting, the Governing Council announced that it intends to raise its key interest rates by 25 basis points at its July meeting.

The ECB expects a further increase at its September meeting, but said the scale of this increase will depend on the evolution of the path of the medium-term inflation outlook.

For now, the interest rates on the main refinancing operations, on the marginal lending facility and on the deposit facility remain unchanged at 0.00%, 0.25% and -0.50%, respectively.

“After September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further interest rate hikes will be appropriate,” the ECB said in a statement on Thursday.

“In line with the Governing Council’s commitment to its medium-term target of 2%, the pace at which the Governing Council adjusts its monetary policy will depend on the data it receives and how it assesses inflation developments over the medium term.”

Annual consumer price inflation in the 19 euro area members hit a new high of 8.1% in May, but the ECB in its previous guidance indicated that a first rate hike would only come after the formal end of its net purchases. of assets on July 1 .

Markets were eagerly awaiting the meeting in Amsterdam on Thursday, the first of the Governing Council outside Frankfurt since the start of the coronavirus pandemic, for signs of how aggressive the change in interest rates will have to be in the coming months.

Policymakers face the challenge of containing inflation without exacerbating the economic slowdown resulting from the war in Ukraine and the associated sanctions and embargoes imposed between the European Union and Russia, previously a major source of energy imports for the bloc.

Economists are divided on whether to expect 25 basis point or 50 basis point hikes at the July and September meetings, with the ECB widely expected to exit negative rate territory by the end of September from its current all-time low of -0, 5%. .

Slower growth, higher inflation

The ECB also lowered its growth forecasts and revised upwards its inflation forecasts. Annual inflation is now expected to reach 6.8% in 2022, falling to 3.5% in 2023 and 2.1% in 2024. This marks a substantial increase from the March projections of 5.1% in 2022. , 2.1% in 2023 and 1.9% in 2024.

Growth forecasts have been revised significantly to 2.8% in 2022 and 2.1% in 2023, and revised slightly to 2.1% in 2024. This compares with projections at the ECB’s March meeting of 3.7% in 2024. 2022, 2.8% in 2023 and 1.6% in 2024.

Randall Kroszner, an economics professor at the University of Chicago and former governor of the Federal Reserve System, told CNBC ahead of Thursday’s meeting that it was “very important” for the ECB to start tinkering with interest rates.

The US Federal Reserve began raising rates in March and implemented a 50 basis point hike in May, the highest in 22 years, with FOMC meeting minutes pointing to more aggressive hikes ahead. The Bank of England raised rates at four consecutive meetings to push the benchmark interest rate to a 13-year high.

“Inflation is very high, it has the potential to consolidate unless [ECB policymakers] they move, and they move aggressively and make it clear that they’re going to move forward,” Kroszner told CNBC’s “Squawk Box Europe” on Thursday.

“They run the risk of inflation getting entrenched, inflation expectations becoming unanchored and having to raise rates much more than they would have to.”

However, Kroszner expressed empathy with the difficult position the Governing Council finds itself in, given Europe’s proximity to the war in Ukraine, interdependence with Russia and therefore the state of economic peril.

“The concern they have is that there are so many negative shocks coming from the war, sanctions, uncertainty, that the economy is going to slow down even without raising rates, so inflationary pressures are going to ease,” he said.

“But there’s enough inflationary pressure and enough risk that inflation expectations become unanchored that they really need to move.”

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