Faced with “undesirably high” inflation and the observed slowdown in economic growth in the eurozone, the ECB’s Governing Council unveiled on Thursday 9 June in Amsterdam the sequence that will lead to a gradual rise in the monetary institute’s interest rates, starting on Thursday 21 July with a 0.25% increase in the three key rates.
We have unanimously decided to take “further steps in the normalisation of our monetary policy”, said ECB President, Christine Lagarde.
Firstly, after the completion of the PEPP operation in March (see EUROPE 12855/8), the Monetary Institute will put an end to another unconventional instrument by stopping its purchases under the asset purchase programme (APP) as of 1 July 2022. Amounts resulting from the redemption of securities acquired through this operation and reaching maturity will be reinvested for “an extended period” after the start of an interest rate recovery.
Secondly, the ECB is again using its conventional instruments. It gives indications on the future direction of its monetary policy in terms of rates (forward guidance). Considering that the three necessary conditions set in July 2021 are “met” (see EUROPE 12767/16), it will raise the three key rates by 25 basis points on 21 July.
Thus, the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility will rise to 0.25, 0.50 and -0.25% respectively.
Asked about a rate hike limited to 0.25% in July, Ms Lagarde argued that the ECB will raise rates for the first time in “eleven years” and bring them out of negative territory. “In times of great uncertainty, gradualism is probably appropriate”, she said, advocating an increase that is “significant but not excessive and that shows a way forward”.
Third, the ECB expects to raise rates again in September. The calibration of this increase will depend on new inflation projections. If these medium-term projections remain at the current level (2.1% in 2024) or deteriorate, a higher increase in all three key rates will be appropriate on Thursday 8 September.
On the basis of its current analysis, the monetary institute anticipates further “gradual and sustained” interest rate hikes after September, in order to meet its mandate to maintain inflation at 2% over the medium term.
The ECB recalls that any decision will be based on updated data and it reserves the right to act flexibly in order to readjust its monetary policy according to the circumstances. It will do its utmost to avoid a fragmentation of financing conditions, which could materialise in particular through excessive divergences in the interest rates of long-term sovereign securities. On this point, Mrs Lagarde mentioned the possibility of new monetary tools, refusing to say more.
On Thursday, the ECB significantly revised upwards its inflation forecast from March to 8.1% in May in the eurozone (see EUROPE 12908/23). “Inflationary pressures have broadened and intensified”, noted Ms Lagarde, citing the impact of the Russian invasion of Ukraine on energy prices (+39.2% year-on-year) and food prices (+7.5% in May), supply chain disruptions related to anti-Covid-19 health measures in China and wage increases.
The envisaged path of inflation is now as follows: 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024.
On the other hand, the Frankfurt institute has revised its growth forecasts significantly downwards, as the war in Ukraine is also disrupting international trade and undermining the confidence of economic players. However, employment is doing well, targeted state fiscal measures continue to take effect and the savings built up during the Covid-19 pandemic are a safety net.
“Once current headwinds abate, economic activity is expected to pick up again”, Lagarde said.
The growth path now envisaged for the eurozone is as follows: 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024.
See the ECB’s monetary policy decisions: https://aeur.eu/f/21a (Original version in French by Mathieu Bion)