The European Central Bank announces the end of its monetary support to the economy following years of buying bonds and decides to raise interest rates.
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The European Central Bank ends bond buying and decides to raise interest rates
In the face of record inflation, the European Central Bank announced today, Thursday, that it is ending its monetary support for the economy following years of buying bonds, and confirmed its intention to raise key interest rates in July for the first time in more than a decade.
The central bank intends to “raise key interest rates by 25 basis points” at its next meeting on July 21, before “another hike in September.”
Foundation President Christine Lagarde said the bank would approve a “series” of interest rate increases “over the next few months depending on medium-term inflation expectations”. The European Central Bank last raised interest rates in May 2011.
Since December, the Bank has been surprised by inflation, which accelerated further with the war in Ukraine, and averaged 8.1 percent over the course of a year in May, while 14 out of 19 eurozone countries registered a higher level than this rate.
The current inflation rate is unprecedented since the introduction of the single currency and is four times higher than the European Central Bank’s 2 percent target.
Lagarde stressed that “inflation is not desirable” and the European Central Bank “will ensure that it returns to the target.” But the hoped-for price drop will take time, as the European Central Bank sharply raised its inflation forecast to 2024.
In a related context, the institution noted the start of a rise in wages once morest the background of “strong demand for manpower”, but it does not see any risks of this leading to a “vicious circle” that would further increase prices.
The bank pointed to the possibility of raising interest rates by more than 25 points in September “if inflation expectations in the medium term remain unchanged or deteriorate.”
Central banks aim to raise key interest rates to control inflation and demand pressure.
But the effect of this measure will not be immediate and will appear “in the long term”, as Christine Lagarde warned, while her institution is accused of slowing down in the face of rising prices.
The European Central Bank wants to follow a very gradual monetary tightening schedule.
Accordingly, the institution confirmed that it would first finish “on July 1” the purchase of assets, which is a prerequisite before starting to raise interest rates. This program enabled the European Central Bank to buy bonds in the market with the aim of lowering financing costs and reviving the economy.
The bank has bought regarding five thousand billion euros in bonds since 2015, but this support mechanism has been overtaken by events in the face of accelerating inflation.
