Inflation: the ECB announces a series of rate hikes from July, a first in more than a decade – Le Monde

The director of the European Central Bank (ECB), the Frenchwoman Christine Lagarde, on June 9, 2022, in Amsterdam. JOHN THYS / AFP The European Central Bank (ECB) decided on Thursday, June 9, to stop its monetary support measures by ending years of asset purchases and announced that it would raise its key rates in July to fight against inflation – something that hadn’t happened in over ten years. Announced at the end of a meeting of the Board of Governors, relocated to Amsterdam, these decisions, widely expected, mark a historic turning point after years of cheap and abundant money policy. While the other major central banks have already begun to tighten their monetary policy, the guardians of the euro “intend to raise key rates by 25 basis points at the meeting in July”, before “another rise in September,” according to the institution’s press release. This will be the first rate hike since May 2011. Inflation dynamics accelerated by the war in Ukraine Since December, the ECB has been surprised by the dynamics of inflation, which has accelerated further due to the war in Ukraine. It reached 8.1% over one year in May, with fourteen countries (out of the nineteen in the euro zone) being above this average. Unheard of since the introduction of the single currency and a level four times higher than the ECB’s target, set at 2%. The hoped-for decline in prices is long overdue: the ECB sharply raised its inflation forecasts until 2024 on Thursday. The institution now expects inflation of 6.8% in 2022, which should then slow to 3.5% in 2023, but remaining, with 2.1%, above the 2% target, even in 2024. But “if the medium-term inflation outlook persists or deteriorates”, an increase higher rates, above 25 points, “will be appropriate at the September meeting”, warns the ECB. For several weeks already, the “hawks” of the institution, supporters of greater monetary rigor, have been pleading for increases of 50 basis points. Read also Article reserved for our subscribers The impossible equation of the European Central Bank in the face of the risk of stagflation Other central banks facing high inflation, such as the Fed (the American Federal Reserve) and the Bank of England, have already engaged in a cycle of rate hikes. End of asset purchases The ECB has locked itself into a very gradual monetary tightening schedule and departing from it now would damage its credibility. Thus, the institution confirmed on Thursday that it was going to put an end “on July 1” to its net redemptions of assets, a prerequisite before starting to raise its rates. Spearheading, with negative key rates, its action against deflation, these programs have enabled the ECB to buy bonds on the market with a vengeance to lower financing costs and revive the economy. The colossal amount of some 5,000 billion euros of bonds has been bought by the ECB since 2015. In the face of galloping inflation, this support is no longer necessary. Read also: Article reserved for our subscribers Worried about inflation, the European Central Bank reduces its monetary support The end of the negative interest rate policy initiated in 2014, which has aroused waves of criticism in Germany in particular, is delicate. This policy means that banks are taxed – by −0.5% to date – on their deposits entrusted to central banks for lack of distributing them via loans. The ECB must take care not to disrupt European growth already seriously shaken by the consequences of the war in Ukraine. The institution thus lowered its annual growth forecasts on Thursday: the increase in gross domestic product (GDP) should be limited to 2.8% in 2022 in the euro zone, before 2.1% in 2023, against respectively 3 .7% and 2.8% in the latest forecasts, in March. The ECB must also be careful that a rate hike does not lead to fragmentation on the sovereign debt market in the euro zone, in other words that European states do not borrow at too different levels. Read the decryption: Article reserved for our subscribers Energy shock, slow growth: in Europe, the specter of stagflation Le Monde with AFP