The European Central Bank has confirmed that it intends to introduce an ECB interest rate hike of 25 basis points at its July monetary policy meeting.

In the meantime, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25% and -0.50% respectively.

The bank’s Governing Council also confirmed that there will be another interest rate increase in September.

“The calibration of this rate increase will depend on the updated medium-term inflation outlook. If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,” said an ECB statement.

When effected, the ECB interest rate increases will immediately lead to higher monthly repayments for mortgage borrowers, unless the loan is fixed. Business borrowing costs will also rise.

In Association with

Beyond September 2022, the ECB explained, based on its current assessment the Governing Council anticipates a "gradual but sustained" path of further increases in interest rates.

“In line with the Governing Council’s commitment to its 2% medium-term inflation target, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and how it assesses inflation to develop in the medium term,” the ECB stated.

The European Central Bank has not raised rates in 11 years, and the deposit rate has been in negative territory for the past eight years.

On the issue of inflation, ECB staff projections foresee eurozone annual inflation at 6.8% in 2022, before it is projected to decline to 3.5% in 2023 and 2.1% in 2024.

Inflation excluding energy and food is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024 – also above projections from the ECB as recently as March 2022.

On economic growth in the Eurosystem, ECB economists foresee annual real GDP growth at 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024.

Compared with the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up.

Farewell to QE

The ECB also announced that it is terminating its asset purchase programme (APP) as of 1 July 2022.

However, the Governing Council said it intends to continue reinvesting in full the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and “for as long as necessary to maintain ample liquidity conditions and an appropriate monetary policy stance”.

For sovereign and corporate bonds purchased under the pandemic emergency purchase programme (PEPP), the Governing Council said it intends to reinvest the principal payments from maturing securities until at least the end of 2024.

In a specific nod to Greece, the ECB stressed that PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions.

“This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic.

“Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”