The European Central Bank (ECB) ended its policy on buying bonds in the markets on Thursday and announced it would raise its interest rates in July for the first time since 2011, stating that it does not exclude no more large increase in September if inflation does not slow.
Consumer price inflation in the 19 countries that have adopted the single currency reached 8.1% year-on-year in May, a level not seen since the euro was created, and the ECB now fears that this increase will be widespread and lead to an inflationary spiral that is difficult to curb.
To prevent this, on July 1 it will stop bond purchases made under the Asset Purchase Program (APP), its main tool for supporting credit and the economy since the debt crisis in the euro zone. .
It will then raise its core interest rates by 25 basis points on July 21 and expects further increases in September, which could be even greater.
The 50 basis increase is the largest increase the institution has decided since 2000.
We will ensure that inflation returns to our medium-term target of 2%said the institution’s president Christine Lagarde, at a press conference.
The deposit amount of ECB is currently pegged at -0.5% and Christine Lagarde said recently that it could drop to zero or slightly higher by the end of the third quarter.
Inflation is expected to remain above 2% in 2024
The extent of future rate increases has been the subject of heated debate within the organization for several months. The chief economist of ECBPhilip Lane defended quarter point increases in July as much as in September while others pleaded not to exclude half -point increases.
The ECB gave further argument late on Thursday by raising inflation forecasts again: it expects prices to rise 6.8% this year, against 5.1% in its forecasts for March, then 3.5. % in 2023 and 2.1 % in 2024, i.e., four consecutive years higher than its 2 % target.
The Governing Council expects that a gradual but continuous sequence of further increases in interest will be appropriateexplanation of the Council in a press release. High inflation is a big challenge for all of us.
In the markets, these statements and the new forecasts have resulted in a further increase in rate expectations: investors are now pricing a total increase of 144 basis points by the end of the year, six points that’s more than the announcements on Thursday, which were consistent with rate increases per meeting starting in July, some of which were more than 25 points.
And they expect an overall increase of 240 basis points in the deposit rate by the end of 2023, which will lower it to close to 2%.
While defending the strategy of gradual tightening of monetary policy, Christine Lagarde promised on Thursday that ECB will not allow to widen the differences between the funding costs of the Member States of the euro area.
We are determined, determineddid he say.
Even after the planned rate increase in July, the ECB will lag behind several other large central banks, including the U.S. central bank and the Bank of England, which have already raised interest rates and signaled that they will continue.
Unlike the US central bank, the ECB has not yet taken a step in reducing its balance sheet, the Board of Governors reaffirms the opposite of their intention to continue reinvesting money that matches the maturity of its portfolio of government and corporate bonds, representing of about 5000 billion euros.
The neutral rate has not yet been determined
Another debate to come is the definition of neutral ratethat is, the level at which basic interest rates are not a stimulus or a brake on economic growth: this level is not defined or easily measurable, which does not allow investors to predict the level at which ECB stop raising charges.
The possibility of a larger increase from September indicates the risk of a monetary policy error ECBcommented Bill Papadakis, strategist of Lombard Odier, an independent Swiss banking group.
Markets are currently expecting a key rate peak at more than 2%. We believe this will tighten monetary policy and we doubt that the Eurozone economy will be able to withstand such harsh conditions due to the current challenges.does he think.
Source: Radio-Canada
