This will be the ECB’s first rate hike since 2011, when the ill-fated move to tighten monetary policy after the financial crisis was quickly reversed as much of the continent still grappled with economic distress. The deposit rate went negative for the first time in 2014.
The planned rate increases come even though the Frankfurt institute has cut its economic growth forecasts for this year and next. He now expects growth of 2.8 percent this year and 2.1 percent next year, versus previous forecasts of 3.7 percent and 2.8 percent, respectively. However, growth of 2.1 percent is expected for 2024, which is higher than the previously forecast 1.6 percent.
The Eurozone recovery was derailed first by the omicron wave of Covid and now by the Russian invasion of Ukraine which has exposed countries like Germany and Italy’s heavy reliance on Moscow.
Ms Lagarde said: “In the near term, we expect activity to be dampened by high energy costs, deteriorating terms of trade, greater uncertainty and the negative impact of high inflation on disposable income.
“The war in Ukraine and renewed pandemic restrictions in China have exacerbated the supply bottlenecks. As a result, companies are facing higher costs and disruptions in their supply chains, and their prospects for future production have worsened.”
The ECB moved more slowly than other major central banks, trading behind the Bank of England, which first hiked rates in December, and the US Federal Reserve, which hiked in March on the perilous state of the euro-zone economy.
Ms Lagarde said it was important to provide early warning of interest rate hikes and to proceed slowly as the economy was not used to rising borrowing costs.
“It’s good practice to start with an incremental increase that is … not excessive,” she said, and “shows a path” for policy to follow going forward.
There is a risk that food and energy price inflation will remain high for some time and that corporate capacity could be permanently affected, damaging the economy for a longer period, warned the ECB President, while the war also poses a risk.
“Risks related to the pandemic have receded, but the war remains a significant downside risk to growth. In particular, a further disruption to the euro area’s energy supply would be a major risk,” she said.
“In addition, if the war escalates, economic sentiment could deteriorate, supply constraints could increase, and energy and food costs could remain higher than expected on an ongoing basis.”
ING economist Carsten Brzeski said the rate hike was a delicately balanced decision by the ECB.
“With inflation scorching but the eurozone economy slowing down and stagnation or even recession, the ECB’s window of opportunity to normalize monetary policy has narrowed almost daily,” he said.
“The ECB has just announced the end of a long era. However, it is far from certain whether this will also be the beginning of a new era of continuously rising interest rates.”
https://www.telegraph.co.uk/business/2022/06/09/christine-lagarde-signals-end-eurozones-negative-rates-era/ Christine Lagarde signals end of eurozone’s negative rates era