Preoccupied with inflation dynamics, the European Central Bank (ECB) met in Amsterdam on Thursday to prepare for the exit from its controversial negative rates policy, starting by packing up its latest debt-buying tool.
End of net asset purchases in July
As a first step, the ECB announced that it would end its net asset purchases “on July 1 ” , a prerequisite before starting to raise its rates during the same month to fight against galloping inflation. in the euro zone. The institute will however continue to “reinvest, in their entirety”, the securities of its portfolio maturing, according to the press release. These debt buyback programs launched in 2015 had made it possible to maintain favorable borrowing rates for households, companies and States, in a context of sluggish inflation.
The growth forecast revised downwards
The European Central Bank has significantly raised its inflation forecasts, while lowering that of GDP growth, for the years 2022 and 2023 in the euro zone, due to the war in Ukraine , which will “continue to weigh on the economy “. For the euro zone, the institution now expects inflation of 6.8% in 2022, which should then slow to 3.5% in 2023, and remain with 2.1% in 2024 still above its 2% target. GDP growth is expected to reach 2.8% in 2022 in the euro zone, before 2.1% in 2023, according to new ECB forecasts published in a press release after a monetary policy meeting.
“ Russia ‘s unjustified aggression against Ukraine continues to weigh on the economy in Europe” while “inflationary pressures have widened and intensified” summed up the institution. The ECB cites “soaring energy and food prices, notably due to the impact of the war” to explain this phenomenon.
Although inflation is expected to remain “abnormally high for some time”, “moderate energy costs, easing pandemic-related supply disruptions and normalization of monetary policy should lead to lower “, adds the ECB.
A rise in rates, a first for ten years
To deal with this “abnormally high” inflation in the euro zone, the institution announced the first rate hike in more than ten years, scheduled for July. A first increase in its interest rates of 0.25 point “in July” was announced to try to stem the galloping inflation in the euro zone, a historic turning point after more than ten years of rates at their lowest.
While the other major central banks have already begun tightening their monetary policy, the guardians of the euro “intend to raise interest rates by 25 basis points at the meeting in July”, before ” another hike in September,” according to a statement issued after a meeting of the Governing Council of the ECB.
The ECB is expected to carry out “a series” of rate hikes over the next few months to try to curb inflation, said its president Christine Lagarde . The Frankfurt institute does not intend to “limit itself” to the rise in July, but plans “a series of movements over the coming months, depending on the outlook for inflation in the medium term”, she explained. at a press conference. “So can we expect July’s interest rate hikes to have an immediate effect on inflation? The answer to this question is no”, added Christine Lagarde, stressing that the impact would be seen “over time. »
Borrowing rates under surveillance
The ECB must also be careful that a rate hike does not lead to fragmentation on the sovereign debt market in the euro zone, in other words that European states do not borrow at too different levels. The risk is that along the way the most indebted countries will suffer from the rise in their borrowing costs. Faced with this, “we can design and deploy new instruments if necessary,” Christine Lagarde recently assured.
A “beginning” of wage increases
The ECB observes for the first time that the rise in wages in the euro zone has started in the face of inflation and the shortage of labor in certain sectors, said Christine Lagarde. “Wage growth, including in the forward-looking indicators, has started to kick in,” she said, pointing to “strong labor demand” and “vacancies” in “de many sectors.