The European Central Bank (ECB) announced on Thursday that it would raise rates for the first time in 11 years in July and then again in September.
Two quarters after the 25-person monetary policy meeting in Amsterdam, where inflation has become a “major challenge” and these forces have “expanded and intensified” in 19 euro-using countries. There was a surprising announcement that the points would be raised. currency.
In addition, the stimulus package will end next month.
The move highlights concerns about the level of annual consumer price inflation, which reached 8.1% in May. This is the highest since the statistics started in 1997. The bank’s goal is 2%.
The ECB said that if the inflation outlook persists or worsens, “a larger increment is appropriate for the September meeting.”
The Federal Reserve Board halved its key interest rates on May 4, showing the prospect of such a significant rise. The Bank of England has approved four hikes since December.
The prospect of a rapid rise in central bank interest rates has shaken the stock market as higher interest rates increase the return of low-risk alternatives to equities.
As Russia’s war in Ukraine shocks the global economy, raising interest rates in Europe is also complicated by weakening the outlook for economic growth.
Higher rates can make credit more expensive for businesses. However, according to a bank statement, the path of growth is “gradual but sustainable.”
The market is currently waiting to hear more details from bank governor Christine Lagarde at her post-meeting press conference.
The conference was held in Amsterdam as one of the extraordinary gatherings of banks away from their headquarters in Frankfurt, Germany.
“High inflation is a big challenge for all of us,” the bank said in a policy statement.
“The Governance Council will ensure that inflation returns to its 2% target in the medium term.”
Watch the ECB press conference live: President Christine @ Lagarde Explain today’s monetary policy decisions @DNB_NL https://t.co/ZO0kZfflb5
— European Central Bank (@ecb) June 9, 2022
Higher rates are the usual tool for fighting inflation. By raising benchmarks, central banks can influence the amount of money financial institutions, businesses, consumers and governments have to pay to borrow the money they need. Therefore, higher rates help cool the overheating economy.
However, higher rates can also weigh on growth. It makes the ECB’s job a delicate balance between eradicating inflation and slowing economic activity.
The ECB on Thursday lowered its growth forecast for this year from 3.7% to 2.8%.
Inflation has been raised, with inflation averaging 6.8% this year, surpassing the March forecast of 5.1%, and the key forecast for 2024 has been raised from 1.9% to 2.1%.