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The European Central Bank Raises Interest Rates For The First Time In 11 Years

By Cristian Bustos. Originally published at ValueWalk.

European markets European Commission

The European Central Bank (ECB) began to raise interest rates Thursday by 25 basis points as of July 9. The rise will be the first in 11 year and will put an end to the 0 interest rate policy that has prevailed in the region.

The European Central Bank Hike

According to Reuters, the Governing Council of the entity met in order to stop the sharp rise in inflation due to the war in Ukraine.


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In addition, the European Central Bank announced that as of September, “a gradual but sustained rhythm of more increases in interest rates will be appropriate,” although inflation data needs to be processed to determine the exact increase.

President Christine Lagarde said during a news conference, “We will make sure that inflation returns to our 2% target over the medium term. It is not just a step, it is a journey.”

The Governing Council also conceded that the net purchases under its public asset purchase program (APP) will end in July, as anticipated by members of the Executive Committee in recent weeks.

Inflation

In addition, the entity raised inflation forecasts as the crisis unleashed by the invasion of Ukraine “will continue to weigh on the economy.”

For this reason, the European Central Bank now forecasts that inflation will reach 6.8% in 2022, 3.5% in 2023, and 2.1% in 2024 —still above the 2% target.

As for GDP, the ECB forecasts a 2.8% growth in 2022 in the eurozone, above the 2.1% expected in 2023 and down from 3.7% and 2.8%, respectively, from the latest March forecasts.

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

In a note to clients, Nordea said: “Given the ECB’s hawkish signals, we now expect the central bank to follow the 25 basis point July rate hike with 50 basis point moves in both September and October.”

“After that, the central bank is likely to slow down, hiking by 25 basis points in December.”

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