The European Central Bank ended a long-running stimulus scheme on Thursday and said it would deliver next month its first interest rate hike since 2011, followed by a potentially larger move in September. With inflation at a record-high 8.1 per cent and still rising, the ECB now fears that price growth is broadening out and could morph into a hard-to-break wage-price spiral, heralding a new era of stubbornly higher prices.
The central bank for the 19 countries that use the euro said it would end quantitative easing on July 1, then raise interest rates by 25 basis points on July 21. It will then hike again on September 8 and go for a bigger move, unless the inflation outlook improves in the meantime.
“We will make sure that inflation returns to our 2 per cent target over the medium term,” ECB president Christine Lagarde told a news conference. “It is not just a step, it is a journey,” she said of the moves signalled on Thursday.
Some policymakers had advocated a bigger move in July but eventually gave in and the final policy decision was approved unanimously, sources told Reuters. The rapid rise in inflation was driven initially by energy and food prices as economies emerged from Covid-19 lockdowns but Russia's invasion of Ukraine has accelerated those trends and even underlying inflation is now at twice the ECB’s target.
The size of rate hikes has been intensely debated by ECB policymakers.
