ECB signals rate hike, eyes bigger move in September

  • Promises a rate hike of 25 basis points in July
  • Says he will walk again in September and a bigger move is possible
  • Inflation rises, widens
  • Lagarde press conference at 12:30 GMT

FRANKFURT/AMSTERDAM, June 9 (Reuters) – The European Central Bank ended a long-running stimulus program on Thursday and said it would carry out its first interest rate hike since 2011 next month, followed by a a potentially larger measure in September.

With inflation at a record high of 8.1% and still rising, the ECB now fears that price growth will widen and turn into a hard-to-break wage-price spiral, heralding a new era of prices. stubbornly higher.

The central bank of the 19 countries that use the euro said it would end quantitative easing on July 1 and then raise interest rates by 25 basis points on July 21. It will then rise again on September 8 and go further, unless the inflation outlook improves in the meantime.

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“We will ensure that inflation returns to our medium-term target of 2%,” ECB President Christine Lagarde told a news conference. “It’s not just a step, it’s a journey,” she said of the moves announced Thursday.

Some policymakers had pushed for a bigger move in July but eventually relented and the final policy decision was approved unanimously, sources told Reuters. Read more

The rapid rise in inflation was initially driven by energy and food prices as economies emerged from COVID-19 shutdowns, but Russia’s invasion of Ukraine accelerated these trends and even core inflation is now twice the ECB’s target.

The size of the rate hikes has been intensely debated by ECB policymakers, with chief economist Philip Lane favoring moves of 25 basis points in July and September, but others arguing for 50 basis points to be taken into account.

Supporting their case, the ECB again raised its inflation projections to 6.8% for this year against a previous forecast of 5.1%. It predicts inflation of 3.5% in 2023 and 2.1% in 2024, which would be a fourth consecutive year of overshoot.

Lagarde said that was too high and that similar projections three months from now would require faster rate hikes.

“If you’re at 2.1% in 2024 or beyond, then the adjustment increment will be higher? The answer is yes,” Lagarde said.

A 50 basis point hike, the next logical hike, would be the largest one-time ECB rate hike since June 2000. At minus 0.5%, the ECB deposit rate has been in negative territory since 2014.


“Given that our forecasts point to a further rise in core inflation in the Eurozone over the coming months, we now expect the ECB to hike rates by 25 basis points in July and by 50 basis points base in September,” said Frederik Ducrozet, strategist at Pictet.

“We expect the ECB to return to the ‘benchmark pace’ of 25 basis point hikes, but they are expected to rise in October and December, and the 50 basis point option will likely remain on the table until core inflation will come down significantly.”

As of Thursday night, markets were pricing in 144 basis points of rate hikes this year, implying an increase at every meeting from July, with several moves exceeding 25 basis points.

They anticipated combined moves of 240 basis points in the deposit rate by the end of 2023, putting the peak in interest rates at nearly 2%.

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“I think in times of great uncertainty, progressiveness is probably appropriate, more than if the path is clear, well identified and we all understand where we are heading,” said Lagarde, who said earlier this year that a rate hike in 2022 was highly unlikely.

Some economists have argued that the ECB is already too late in tackling inflation, so raising rates to a neutral level, where it neither stimulates nor dampens the economy, will not be enough.

“The ECB is still lagging behind,” said Commerzbank chief economist Jörg Krämer.

“It’s not enough to take your foot off the accelerator, you also have to press the brakes,” Krämer said. “But that is precisely what he is not prepared to do, which is why we expect inflation to average well above 2% in the coming years.”

The ECB’s first rate hike in more than a decade will still leave it behind most of its global peers, including the US Federal Reserve and the Bank of England, which have risen aggressively and are promising even more stock.

Unlike the Fed, the ECB also has no plans to shrink its balance sheet, with policymakers reaffirming their commitment to continue reinvesting maturing cash from the 5 trillion euros of public and private debt held. by the ECB.

Even as she promised rate hikes, Lagarde pledged not to allow the borrowing costs of former eurozone debt-crisis countries to be pushed up again by financial markets. “We are committed, committed! said Lagarde. [nL1N2XW1BX]

ECB interest rates and balance sheet

While the start of the policy tightening is now set, the end point remains uncertain.

While Lagarde said rates should move closer to neutral, that level is indefinite and unobservable, leaving investors guessing how far the ECB wants to go. Read more

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Additional reporting by Francesco Canepa in Frankfurt and Marc Jones in London; Editing by Catherine Evans

Our standards: The Thomson Reuters Trust Principles.

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