INFLATION

ECB announces rate hike for July 2022

EZB. © Mika Baumeister on Unsplash
ECB. © Mika Baumeister on Unsplash

The era of zero and negative interest rates is coming to an end: As the European Central Bank (ECB) confirmed yesterday, the central bank’s purchases of billions of bonds will end at the beginning of next month. The key interest rate was also confirmed at zero percent, but this is unlikely to remain the case for much longer. According to Handelsblatt, the end of bond purchases is a prerequisite for an initial interest rate hike. The monetary authorities want to raise the deposit interest rate, which is decisive for monetary policy, by 0.25 percentage points in July. For September, they hold out the prospect of an even larger rate hike.

EU Commission raises inflation forecast drastically

Inflation in Europe well above ECB target

The ECB’s declared inflation target is 2%, currently, the eurozone is at 8.1% (and in some cases well above). At least for today – and probably the month of June – the previous interest rates were confirmed. Means: everything stays the same, the key interest rate at zero percent, penalty interest for bank deposits at -0.5 percent. However, it is quite possible that the penalty interest on bank deposits will soon be history, at least that is what Christine Lagarde, head of the central bank, indicated. According to this, the negative interest rates could be increased in two steps by 0.25 percent each. The reported start for this would be the end of July.

“High inflation is a major challenge for all of us. Russia’s unjustified aggression toward Ukraine continues to weigh on the economy in Europe and beyond. It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term. However, the conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labor market, fiscal support, and savings built up during the pandemic,” ECB President Lagarde said at the announcement.

What should the ECB do to combat the high inflation

European Central Bank could make an even stronger rate hike

In addition to its further monetary policy course, the ECB has published its inflation forecasts. It is now assumed that inflation will be higher this year and in the coming years than it was last March. The annual inflation rate is expected to be 6.8 percent in 2022, before falling to 3.5 percent and 2.1 percent in 2023 and 2024, respectively. The ECB, therefore, expects inflation rates above its target value of two percent over the entire horizon. If nothing changes in the forecasts in September, it will decide to take a stronger interest rate hike.

According to the FAZ, this is the first interest rate hike in the euro area in eleven years. As early as September, the negative interest rates introduced by former ECB President Mario Draghi in 2014 could be history. The ECB had resisted this step for a long time. The US central bank, the Fed, had already initiated the turnaround in interest rates in March, while the ECB had explicitly decided against it in February.

Head of ECB signals rate hikes in the Euro zone by the end of September

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