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A press conference will be held at 12:30 Irish time. Alamy Stock Photo
Inflation

ECB ups key interest rates as it warns 'inflation to remain undesirably elevated for some time'

The July rate hike will be the first in 11 years.

LAST UPDATE | Jun 9th 2022, 1:20 PM

THE EUROPEAN CENTRAL Bank has said it will raise its key interest rates for the first time in over a decade at its July 21 meeting.

It expects inflation to remain “undesirably elevated for some time” and forecast it to soar to 6.8 percent in 2022, before easing to 3.5 percent in 2023 and 2.1 percent in 2024.

The announcement comes as Ireland records the largest annual increase in the consumer price index since 1984, with costs rising by an average of 7.8%.

The ECB’s previous projections in March had seen consumer price rises reaching 5.1 percent in 2022, 2.1 percent in 2023 and 1.9 percent in 2024.

With the eurozone under pressure from record-high inflation, the interest rates would rise by 25 basis points.

The ECB left open the possibility that it would make a more drastic, half-percentage-point increase in September rather than the more usual quarter-point adjustment, saying that if the inflation outlook persists or deteriorates, “a larger increment will be appropriate at the September meeting”.

Bank President Christine Lagarde said the increases would not be the last. She said the rate-setting council anticipates “a gradual but sustained path of further increases” after September.

The US Federal Reserve raised its key rate by a half-point on May 4 and has held out the prospect of more such large increases. The Bank of England has approved rate hikes four times since December.

The prospect of rapid increases has sent shudders through stock markets, as higher rates would raise the returns on less risky alternatives to stocks.

Rate hikes in Europe also are complicated by weakening prospects for growth as Russia’s war in Ukraine sends shock waves through the economy, particularly through rising energy prices.

Higher rates can make credit more expensive for businesses. The bank said in a policy statement, however, that the path of increases would be “gradual but sustained”.

“High inflation is a major challenge for all of us,” the statement said. “The governing council will make sure that inflation returns to its 2% target over the medium term.”

By raising its benchmarks, the bank can influence what financial institutions, companies, consumers and governments have to pay to borrow the money they need. So higher rates can help cool off an overheating economy.

But higher rates can also weigh on growth. That makes the ECB’s job a delicate balance between snuffing out inflation and blunting economic activity.

The ECB on Thursday slashed its growth projection for this year to 2.8% from 3.7%.

It raised its outlook for inflation, saying that price increases would average 6.8% this year, higher than the 5.1% in its March forecast. It also upped the crucial forecast for 2024 — to 2.1% from 1.9%.

That is significant because it indicates the bank sees inflation as above target for several years, a strong argument for more rate increases.

An ECB move to attack inflation has raised concerns about the impact of higher interest rates on heavily indebted governments, most notably Italy. The bank announced no new support measures that could help such countries, saying only that it would respond flexibility if some parts of the eurozone were facing excessive borrowing costs.

The rate hikes end an extended period of extremely low rates that started during the global financial crisis, which broke out in 2008.

The increases will start from record lows of zero for the ECB’s lending rate to banks and minus 0.5% on overnight deposits from banks.

With reporting by the Press Association and Eoghan Dalton

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