The European Central Financial institution confirms rate of interest hike plans for July and raises inflation forecasts

The European Central Bank faces a difficult balancing act as inflation hits record highs while the war in Ukraine casts a shadow over growth prospects.

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The European Central Bank on Thursday reiterated its intention to hike interest rates at next month’s monetary policy meeting and downgraded its growth forecasts.

After its last monetary policy meeting, the Governing Council announced that it intends to hike interest rates by 25 basis points at its July meeting.

The ECB expects another rate hike at the September meeting but said the magnitude of the hike would depend on the evolution of the medium-term inflation outlook.

The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25% and -0.50%, respectively.

“After September, based on its current assessment, the Governing Council believes that a gradual but sustained path of further rate hikes will be appropriate,” the ECB said in a statement on Thursday.

“In line with the Governing Council’s commitment to its 2% medium-term objective, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and its assessment of the medium-term path for inflation.”

Annual consumer price inflation in the 19-strong euro area hit a new record high of 8.1% in May, but the ECB indicated in its previous forecast that a first rate hike would come only after its net asset purchases formally ended on July 1 .

Markets had been eagerly awaiting Thursday’s Amsterdam meeting, the first ECB Governing Council meeting outside of Frankfurt since the start of the coronavirus pandemic, to see signs of just how aggressive rate hikes need to be in the coming months.

Policymakers face the challenge of containing inflation without amplifying the economic slowdown resulting from the war in Ukraine and related sanctions and embargoes between the European Union and Russia, previously a major source of energy imports for the block were.

Economists were divided on whether to expect hikes of 25 basis points or 50 basis points at the July and September meetings, with the ECB being widely expected to recover from its current historical low of -0.5% by the end of September range of negative interest rates will climb out. .

Slower growth, higher inflation

The ECB also lowered its growth forecasts and revised its inflation forecasts upwards. Annual inflation is now expected to reach 6.8% in 2022, falling to 3.5% in 2023 and 2.1% in 2024. This represents a significant increase from the March projections of 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.

Growth forecasts have been revised significantly downwards to 2.8% in 2022 and 2.1% in 2023 and slightly upwards to 2.1% in 2024. This compares to forecasts at the ECB’s March meeting of 3.7% in 2022, 2.8% in 2023 and 1.6% in 2024.

Randall Kroszner, an economics professor at the University of Chicago and a former governor of the Federal Reserve System, told CNBC ahead of Thursday’s meeting that it was “very important” that the ECB start changing interest rates.

The US Federal Reserve began raising interest rates in March and implemented a 50 basis point hike in May, the largest in 22 years, with FOMC meeting minutes pointing to more aggressive rate hikes. The Bank of England has hiked interest rates for four consecutive meetings to take interest rates to a 13-year high.

“Inflation is very high, it has the potential to solidify unless [ECB policymakers] are moving, and they’re moving aggressively and making it clear that they’re going to keep moving,” Kroszner told CNBC’s Squawk Box Europe on Thursday.

“They run the risk of inflation becoming entrenched, inflation expectations getting off the ground and having to raise rates much more than they would otherwise have to.”

However, Kroszner expressed his sympathy for the difficult position in which the Governing Council finds itself given Europe’s proximity to the war in Ukraine, its ties with Russia and the associated economic vulnerability.

“The concern they have is that there are so many negative shocks from the war, sanctions and uncertainty that even without a rate hike, the economy will slow down, so inflationary pressures will ease,” he said.

“But there are enough inflationary pressures and enough risk of inflation expectations becoming unanchored that they really need to move.”

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