The European Central Bank (ECB) said on Thursday that it would carry out its first interest rate increase in 11 years in July, followed by another hike in September.
The surprise announcement of two quarter-point increases came after the bank’s 25-member monetary policy council met in Amsterdam, saying inflation had become a “major challenge” and that those forces had “broadened and intensified” in the 19 countries that use the euro currency.
It also will end its economic stimulus programme next month.
The move underlines concerns about the level of annual consumer price increases, which hit 8.1 per cent in May, the highest since statistics started in 1997. The bank’s target is 2 per cent.
The ECB held out the possibility that it would make a more drastic, half-percentage-point increase in September rather than the more usual quarter-point adjustment, saying that if the inflation outlook persists or deteriorates, “a larger increment will be appropriate at the September meeting”.
The US Federal Reserve raised its key rate by a half-point on May 4th and has held out the prospect of more such large increases. The Bank of England has approved hikes four times since December.
The prospect of rapid central bank rate increases has sent shudders through stock markets, as higher rates would raise the returns on less risky alternatives to stocks.
Raising rates in Europe is also complicated by weakening prospects for economic growth as Russia’s war in Ukraine sends shock waves through the global economy.
Higher rates can make credit more expensive for businesses. The bank’s statement said, however, that the path of increases would be “gradual but sustained”.
Markets are now waiting to hear more detail from bank president Christine Lagarde at her post-meeting news conference.
The meeting was held in Amsterdam as one of the bank’s occasional gatherings away from its headquarters in Frankfurt, Germany.
“High inflation is a major challenge for all of us,” the bank said in its policy statement.
“The governing council will make sure that inflation returns to its 2% target over the medium term.”
Watch the ECB press conference live: President Christine @Lagarde explains today’s monetary policy decisions @DNB_NL https://t.co/ZO0kZfflb5
— European Central Bank (@ecb) June 9, 2022
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Higher rates are the usual tool to combat inflation. By raising its benchmarks, the central bank can influence what financial institutions, companies, consumers and governments have to pay to borrow the money they need. So higher rates can help cool off an overheating economy.
But higher rates can also weigh on growth. That makes the ECB’s job a delicate balance between snuffing out inflation and blunting economic activity.
The ECB on Thursday slashed its growth projection for this year to 2.8 per cent from 3.7 per cent.
It raised its outlook for inflation, saying that price increases would average 6.8 per cent this year, higher than the 5.1 per cent forecast in its March outlook, while the crucial forecast for 2024 was raised to 2.1 per cent from 1.9 per cent.
