The Governing Council of the European Central Bank (ECB) has unanimously decided that the net debt purchases under its public asset purchase program (APP) finish in july as the members of the Executive Committee had progressed.

To curb the sharp increase in inflation due to the war in Ukraine, the ECB has advanced that at its meeting on July 9 it will undertake a 25 basis point hike in interest rates. In addition, another rate hike has been anticipated in September, although in this case the volume of said increase has not been mentioned.

«High inflation is a great challenge for all of us. The ECB will ensure that inflation returns to its 2% target in the medium term,” its president, Christine Lagarde, stressed at a press conference after Thursday’s meeting in Amsterdam.

The ECB has notably revised upwards its inflation forecasts in the eurozone at 6.8% this year, compared to the 5.1% estimated in the forecasts made in March.

Lagarde has indicated that the the pace of adjustment of monetary policy will depend on the evolution of prices and “from September a gradual but sustained pace of further interest rate hikes will be appropriate.” He recalls that energy has become almost 40% more expensive in the last year.

reinvest bonds

The leader of the ECB has explained that will fully reinvest the principal of the bonds acquired with long maturities after beginning to raise interest rates “with full flexibility” and the instruments at their disposal or new instruments “if necessary”.

In recent months, the ECB has been reduce the volume of purchases. In April it acquired assets worth 40,000 million, while in May they went to 30,000 million and it is expected that this month the volume will be reduced to 20,000 million.

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The entity has maintained interest rate of weekly auctions at 0%that of the marginal credit facility at 0.25% and that of the deposit facility at -0.25%.

The increase in interest rates that will take place in July will be the first carried out by the monetary authority since July 2011. In addition, it will mean returning interest rates to levels unrecorded heights since 2014.

Lower growth forecasts

“Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and the rest of the world.” Lagarde adds that war “is disrupt trade, cause material shortages and contribute to rising prices of energy and raw materials”, factors that will continue to weigh down confidence and slow down growth, especially in the short term.

However, GDP may continue to grow given the reopening of the economy, a strong labor market, fiscal support and the savings accumulated during the pandemic. The agency expects “economic activity to pick up again, once the current headwinds subside.”

Thus, experts foresee a annual real GDP growth of 2.8% this year, 2.1% in the next and 2.1% in 2024. Compared to the March projections, the estimates have been revised down significantly for 2022 and 2023, while for 2024 they have been revised up.

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