The European Central Bank Will Soon End the Stimulus and Lift the Benchmark Interest Rate in July

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The European Central Bank Will Soon End the Stimulus and Lift the Benchmark Interest Rate in July


Follow the steps of the United States, tightening monetary policy and rising benchmark interest rates will spread to all corners of the world. The European Union, for example, wants to end its bond-buying scheme as soon as possible and raise interest rates by July 2022, citing Reuters on Monday (25/4).

The European Union Central Bank (ECB) has removed stimulus at its slowest pace this year. However, this move was hit by a spike in inflation.

The big constraint so far on long-term forecasts is still showing inflation dropping back below the ECB's 2% target. However, according to the new forecast formulated on April 14, the ECBI predicts inflation in 2024 to exceed the central bank's target.


"It's just over 2% so in my interpretation all the criteria for raising interest rates have now been met," said one of the sources, who asked not to be named.

Governing Council members have long criticized the ECB for underestimating inflation, which hit 7.5% last month, and they view the new projections as a move to acknowledge the realities. "When chief economist Philip Lane presented the numbers, people just clapped," said another source.

An ECB spokesman declined to comment. However, no policy proposals have yet been submitted at the next ECB meeting which will take place on June 9.

ECB President Christine Lagarde on Friday said bond purchases would end at the start of the third quarter and a rate hike is likely this year.

Almost all sources say they see at least two rate hikes this year. It really depends on how the market digests the interest rate movement.

The market is forecasting a gain of about 85 basis points for the year, so more than three moves of 25 basis points. This would return the deposit rate of minus 0.5% into positive territory for the first time since 2014.

Policymakers say normalizing the monetary mix should mean a return to neutral interest rates. They want the rules to be taken not to stimulate or restrain growth.

They put this at around 1% to 1.25%, so 150 to 175 basis points above the current rate. "Reaching these levels by the end of 2023 could make sense," another source said.

In fact. EBS interest rates can only increase on condition that bond purchases have been completed. Then all of the 9 policymakers spoke on condition of anonymity. This has to happen on June 30 or July 1. 

Artina, the ECB will be in a position at its July 21 meeting to raise interest rates. "Unless the outlook changes dramatically, I will vote for July," said a third source.

Some sources, however, said they still prefer to wait until September, partly because new forecasts will be available by then and partly to avoid a major policy move during the summer months, when liquidity is lower.

The ECB last raised interest rates in 2011 ahead of the bloc's debt crisis. But this move is considered his biggest policy mistake to date. "Memories of the movement still haunt us. Some people are afraid to make the same mistake," said a fourth source.

On the other hand, the US Federal Reserve is expected to tighten faster. The market is seeing nearly 250 basis points of tightening this year with gains of 50 basis points at multiple confluences.


All ECB policymakers stressed, however, that the outlook could change radially until then as Russia's invasion of Ukraine is a persistent threat to confidence and the COVID-19 pandemic is not over yet.

Some policymakers say that a technical recession, or two consecutive quarters of negative growth, is possible this year but the full-year figures will still be positive.

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