The European Central Bank (ECB) has announced that it will hike interest rates for the first time in more than 11 years next month in an effort to rein in the eurozone’s skyrocketing inflation.
The European Central Bank announced that it will raise its main interest rates by 0.25 percent in July, with further hikes scheduled later in the year.
On July 1, the bank plans to stop its bond-buying stimulus program.
The most recent estimate of eurozone inflation was 8.1 percent, significantly over the ECB’s objective.
“For all of us, high inflation is a huge concern. Over the medium term, the [ECB] governing council will ensure that inflation returns to its objective of 2% “m term,” the European Central Bank stated in a statement.
The steps, according to ECB President Christine Lagarde, are “not just a step, but a journey.”
The ECB’s main policy interest rate is presently at -0.50 percent, but the bank expects it to return to zero or higher by the end of September. In 2011, it hiked interest rates in the eurozone for the first time.
In May, inflation “again climbed sharply” as energy and food costs soared, according to the report.
Inflationary forces, on the other hand, have “broadened and strengthened,” with prices for numerous products and services rising sharply.
As a result, the bank has raised its annual inflation forecast for this year to 6.8%, before dropping to 3.5 percent in 2023 and 2.1 percent in 2024.
The ECB also lowered its eurozone growth prediction from 3.7 percent to 2.8 percent in 2022, and from 2.8 percent to 2.1 percent in 2023.
Several other central banks have begun boosting interest rates in an effort to reduce inflation, which has been quickening due to rising energy prices.
The Federal Reserve has hiked interest rates twice this year in the United States, while the Bank of England has boosted rates to 1%, the highest level in 13 years.
Christine Lagarde, the head of the European Central Bank, predicted inflation will stay “undesirably elevated for some time” following the ECB’s decision.
She claims that energy prices are about 40% higher than a year ago, while food prices jumped 7.5 percent in May, owing in part to the impact of the Ukraine conflict on agricultural supply.
“Do we think the interest rate rise in July will have an immediate effect on inflation? No, that is not the case “she stated
“With this inflation prognosis and the inescapable route for higher rates, the ECB is confronting stagflation dangers full-frontal,” Seema Shah, chief strategist at Principal Global Investors, said.
“The suffocating hold of painfully high living expenses implies that euro area growth will weaken in the second half of this year, with recession becoming more plausible – especially given that strong policy tightening is on the horizon,” says the report.