The Governing Council of the European Central Bank recently announced its intention to raise its key interest rates by 25 basis points at next month’s policy meeting.
The central bank also lowered its growth forecast due to annual consumer price inflation. In May, inflation in the euro zone reached 9.1%, a record level.
However, the ECB has hinted in its previous guidance that a first rate hike will only come on July 1st.
The European Central Bank (ECB) is also forecasting another interest rate hike in September. However, she said the magnitude of this increase will depend on certain factors. One of these factors is the evolution of inflation over the medium term. A statement from the ECB states:
“Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained trajectory of further interest rate hikes will be appropriate.”
The press release continues:
“Consistent with the Governing Council’s commitment to its medium-term 2% target, the pace at which the Governing Council adjusts its monetary policy will depend on incoming data and how it assesses future developments. medium-term inflation.”
As things stand, the interest rates on the main refinancing operations remain unchanged at 0.00%. In addition, the interest rates on the marginal lending facility and the deposit facility remain at 0.25% and -0.50%, respectively. In April, the World Bank also lowered its growth forecast for 2022.
In addition to interest rate hikes, the European Central Bank is also revising its growth forecasts downwards.
European policymakers are now faced with the challenge of containing inflation without worsening the economic stagnation triggered by the war in Ukraine. In addition, the ECB’s strategy to contain inflation must also deal with the associated sanctions and embargoes between the European Union and Russia.
While revising its inflation projections upwards, the ECB also revised its growth forecasts downwards. As a result, the leading financial institution now forecasts that annual inflation will reach 6.8% in 2022. Furthermore, forecasts also suggest that annual inflation would decline to 3.5% in 2023 and 2.1% in 2024. .
The ECB significantly reduced growth forecasts to 2.8% in 2022 and 2.1% in 2023. In addition, the central bank also estimated that growth in 2024 would be 2.1%. These figures show a substantial difference from the projections of the March meeting, which indicated 3.7% in 2022. The same meeting also projected 2.8% in 2023 and 1.6% in 2024.
Prior to the ECB meeting, University of Chicago economics professor Randall Kroszner commented on the interest rate situation. According to Kroszner, the leading financial institution needed to tackle the alarming interest rates in the region.
“Inflation is very high, it has the potential to take hold, unless ECB policymakers act, and they act aggressively and make it clear that they are going to go further“, said Mr. Kroszner.
Furthermore, Mr. Kroszner added that the ECB “runs the risk of seeing inflation set in for a long time“. This would result in higher interest rates than necessary.