AMSETRDAM: The European Central Bank said Thursday that it would raise interest rates for the first time in more than a decade to fight runaway inflation, ending the era of cheap money in the euro area. The ECB Governor met exceptionally in Amsterdam instead of Frankfurt, giving the market an unexpectedly accurate statement on the path to normalization of monetary policy after years of ultra-low interest rates and easy credit. Provided.

The European Central Bank plans a series of rate hikes over the next few months to combat hyperinflation, President Christine Lagarde said Thursday, with the first rise in July immediately rising consumer prices. Warned that it would not weaken. “Do you expect the July rate hike to have an immediate impact on inflation? The answer is no,” she told journalists. Rather, she said the banks were planning “a series of moves during the next month” in connection with the planned rate hike.

Lagarde said wages in the euro area are starting to rise as workers in the block face record high inflation, which could accelerate wage increases as the economy strengthens. He added that there is. “Wage growth has begun to recover, including positive indicators,” Lagarde said in a press conference in Amsterdam after the ECB announced plans to raise interest rates to prevent soaring prices in July. ..

In a statement, the ECB plans to “raise key ECB rates by 25 basis points” at its next meeting on 21 July. Interest rates will be raised again in September, on a scale that is in line with the economic outlook. The ECB last raised rates in 2011.

“The ECB officially ends a long era of unconventional monetary policy,” said Karsten Bruzeski, economist at ING Bank. Pressure has increased against the ECB after other major central banks, such as the Federal Reserve Board and the Bank of England, have already begun to curb prices with aggressive rate hikes. Inflation in the euro area of ​​19 countries rose to a record 8.1% in May, well above the ECB’s 2% target.

The surge was mainly caused by the war in Ukraine, which pushed up the costs of energy, food and raw materials around the world. The ECB raised its inflation forecast while lowering its economic growth forecast for the euro area. “High inflation is a big challenge for all of us,” the ECB said in a statement. Now the focus shifts to the ECB’s chief Christine Lagarde’s afternoon press conference, where she is grilled about the ECB’s next move.

“Degraded growth”

The biggest challenge Lagarde is currently facing is finding the right balance between raising borrowing costs to cool inflation without jeopardizing the already stuttering economy of the euro area. Emphasizing these concerns, the ECB lowered club growth prospects in 19 countries to 2.8% in 2022 and 2.1% in 2023. This is from the previous 3.7% and 2.8%.

“The war in Ukraine has” disrupted trade, led to material shortages and contributed to rising energy and commodity prices, “he said.” These factors weigh on confidence, especially in the short term. Will slow growth, “he added. .. The end of July 1st of the bond purchase scheme will draw a line below the end of a series of debt purchase measures worth a total of around € 5 trillion ($ 5.4 trillion) since 2014.

Abolishing the plan paves the way for what Lagarde called the “lift-off” of tolls. Of the three major ECB interest rates, the so-called deposit interest rate is currently minus 0.5%. That is, the lender pays to deposit surplus cash in the bank. Lagarde said the ECB aims to eliminate the eight-year negative interest rate by the end of September. “Today’s decision shows that we were able to find a compromise between pigeons and hawks,” Brzeski said. “The 50 basis point rate hike in July seems to have been avoided by opening the door to 50 basis points in September.”

Strong labor market

The magnitude of the September rate hike will depend heavily on how the economic outlook changes. Despite releasing a downgraded forecast of economic growth on Thursday, the ECB was optimistic about the long-term outlook. “Once the current headwinds subside, economic activity is expected to recover again,” he said.

“The continuous resumption of the economy, strong labor markets, fiscal support, and the savings accumulated during the pandemic are in place for the economy to continue to grow.” For inflation, the ECB said 2022. He said he expects annual consumer prices to rise from 5.1% in the previous forecast to 6.8%. Inflation has eased to 3.5% in 2023 and 2.1% in 2024, both higher than previously estimated. “These predictions show that inflation will remain undesirably high for some time,” he said. – AFP

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