Under pressure the ECB will raise its key interest rates in June

24th May 2022
-IAM, News

Hugues Chevalier, Economist

Last week, on the 30th anniversary of the Slovenian central bank, the European Central Bank (ECB) President Christine Lagarde announced the end of the asset purchases (APP program) in June at the ECB Council meeting on the 9th. But in a further announcement, the ECB is expected to make a first rate hike on 21 July. This is expected to be followed by further gradual rate hikes, with the second scheduled for September. Assuming a 25 basis point increase each time, the ECB deposit rate would return to 0% in September. And a third move would take it to 0.25% in December. Pressure from several hawkish central banks (German, Dutch, etc.) has overcome the ECB’s wait-and-see attitude and caution. Indeed, inflation accelerated again in April in the Eurozone to 7.5% year-on-year when its target is 2%. And in some eurozone countries, consumer price inflation is now over 10%. The ECB therefore had to react, in particular to avoid an acceleration of the core inflation (excluding food and energy) and the development of a wage-price loop. However, it must remain very cautious. Indeed, European growth has stalled since the beginning of the year due to the rise in energy prices (whose origin is external) and the war in Ukraine, which is disrupting production chains. A too rapid rise in interest rates and an overly vigorous tightening of monetary policy could penalise growth that is already struggling. In particular, the consequences for households and the construction sector could be disastrous if mortgage rates were to rise too quickly. The ECB is thus caught between inflation (its primary mission) and the risk of recession.