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ECB plans July quarter percentage point rise as ultra-loose policy ends

The European Central Bank said at its meeting a few weeks later that it would stop buying billions of euros worth of bonds in early July and raise interest rates by a quarter of a percentage point for the first time in more than a decade.

The announcement, made after the ECB Governing Council meeting in Amsterdam, is an important step towards ending the ultra-easy monetary policy of negative interest rates and massive bond buying that it has been pursuing for the past eight years.

The ECB said: “High inflation is a major challenge for all of us. The Governing Council will ensure that inflation returns to the 2 percent target in the medium term.”

The bank last raised interest rates in 2011 and the deposit rate is now at minus 0.5 percent. There is broad agreement among the 25 ECB board members on the need to raise rates to tackle inflation in the eurozone, which rose by a record 8.1 percent in the period to May, more than quadrupling. of the 2 percent target.

However, there is less consensus on the pace of tightening. ECB President Christine Lagarde and chief economist Philip Lane have indicated quarter-point rate hikes as a benchmark for their July and September meetings – the two following the June decision.

The central bank said it expects “to raise key ECB interest rates again in September”. It added: “If the medium-term inflation outlook continues or deteriorates, a larger hike will be appropriate at the September meeting.”

The pace at which price pressures have increased in recent months has prompted hawks to call for more aggressive action, in line with the Federal Reserve’s strategy of raising interest rates by 50 basis points at a time.

With Russia’s invasion of Ukraine already pushing up food and fuel prices for European consumers, economists are growing fears that a cut off Russia’s gas supply could plunge the eurozone into recession.

There has been speculation about how soon the ECB could begin to shrink its balance sheet by not reinvesting the proceeds of maturing bonds. The ECB said such reinvestments would continue “for an extended period of time after the date on which it starts raising key ECB interest rates and in any case for as long as necessary to maintain adequate liquidity conditions and an appropriate monetary policy stance”.

Investors will watch the press conference with Lagarde, starting at 1.30pm UK time, for clues about how quickly it is likely to raise interest rates and whether rate-setters are more concerned about continued inflation or a sharp slump in growth.

There is broad consensus among economists that the ECB will lower its growth forecasts and raise inflation forecasts for the next three years when released later on Thursday.

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