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ECB plans to raise interest rates for first time in 10 years

ECB plans to raise interest rates for first time in 10 years

by host

FRANKFURT – The European Central Bank will end its bond buys early next month and plans to lift interest rates for the first time in over a decade by 25 basis points at July’s meeting, with inflation projected to top the central bank’s 2 percent target until at least 2024, it said Thursday.

In a statement released after its meeting in Amsterdam, the central bank said it also “expects” to raise rates in September by a “larger increment” if the current inflation outlook doesn’t improve. Looking beyond September, it “anticipates that a gradual but sustained path of further increases in interest rates will be appropriate.”

The strong signal of a larger interest rate hike in September will come as a hawkish surprise, given that ECB chief economist Philip Lane recently described 25-basis-point moves as “benchmark pace.”

High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to its 2 percent target over the medium term,”  said the ECB.

In an unprecedented move, the ECB also published its new staff projections for growth and inflation.

Staff significantly revised up inflation projections to 6.8 percent in 2022 and 3.5 percent in 2023, while the key medium-term inflation projection showed inflation above target at 2.1 percent in 2024.

In the run-up to today’s meeting, five Governing Council members had expressed support for making bigger rates hikes to rein in inflation. The new projections boost the case for aggressive action to keep inflation expectations in check, to stave off higher wage demands that would fuel inflation further.

Hawks will likely cheer the ECB’s sizable upward revision to eurozone GDP growth in the first quarter and the updated staff forecasts, which see growth well above any stagflation or recessionary territory: The staff lowered the GDP outlook for this year and next to 2.8 percent and 2.1 percent, respectively, but revised it up to 2.1 percent in 2024.

“The Governing Council stands ready to adjust all of its instruments, incorporating flexibility if warranted, to ensure that inflation stabilizes at its 2 percent target over the medium term,” it said.  

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