As Europe faces stubbornly high inflation, the European Central Bank stated today that it will cease its bond-buying program on July 1 and signalled a succession of interest rate hikes beginning in July.
This was disclosed in the monetary policy meeting held today, as the Governing Council also said that at its July meeting, it intends to raise key interest rates by 25 basis points.
Russia’s Ukraine conflict continues to wreak havoc on Europe’s and the world’s economies. It is disrupting trade, causing material shortages, and contributing to the rise in energy and commodity prices. These issues will continue to stifle growth and erode confidence, especially in the short run.
What the ECB is saying
The ECB said, “The Governing Council decided to end net asset purchases under its asset purchase programme (APP) as of 1 July 2022.”
Following up on a long-promised move, the ECB said it would end its Asset Purchase Programme, its main stimulus tool since the eurozone debt crisis, and said it would raise rates by 25 basis points in July, then move rates again in September, possibly by a bigger margin.
“The Governing Council intends to raise the key ECB interest rates by 25 basis points at its July monetary policy meeting,” the ECB said.
“The Governing Council expects to raise the key ECB interest rates again in September,” it said. “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.”
What you should know
- For now, the interest rates on the main refinancing operations, marginal lending facility and deposit facility remain unchanged at 0.00%, 0.25% and -0.50% respectively. However, the bank has not raised rates in 11 years and the deposit rate has been in negative territory since 2014.
- The ECB also downgraded its growth forecasts and upwardly revised its inflation projections. Annual inflation is now expected to hit 6.8% in 2022, declining to 3.5% in 2023 and 2.1% in 2024. This marks a substantial increase from its March projections of 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.
- Growth forecasts were revised down significantly to 2.8% in 2022 and 2.1% in 2023 and revised slightly to 2.1% in 2024. This compares to projections at the ECB’s March meeting of 3.7% in 2022, 2.8% in 2023 and 1.6% in 2024.
- The U.S. Federal Reserve began hiking rates in March and implemented a 50 basis point hike in May, its largest in 22 years, with FOMC meeting minutes pointing to further aggressive hikes ahead. The Bank of England has hiked rates at four consecutive meetings to take the base interest rate to a 13-year high.
- The Governing Council stated that it intends to make sure that inflation returns to its 2% target over the medium term.