Amsterdam June 9 (U.S.): The European Central Bank will raise interest rates Next month, for the first time in 11 years and adding another spike in September, other central banks around the world are catching up as they go from supporting the economy during the COVID-19 pandemic to stamping out spiraling inflation.
Thursday’s surprise move marks a turning point after years of ultra-low interest rates but risks weakening economic growth prospects.
The bank’s 25-member monetary policy board, which met in Amsterdam, said inflation had become a “major challenge” and that those forces had “broadened and intensified” in the 19 countries that use the euro currency. Consumer prices rose 8.1% in May. The bank’s target is 2%.
The European Central Bank will first end its purchases of bonds that support the economy and then raise interest rates by a quarter point in July, the Associated Press said.
She left open the possibility of a drastic increase of half a percentage point in September, saying that if inflation expectations persist or deteriorate, “a larger increase would be appropriate”.
The US Federal Reserve raised its key interest rate by half a point on May 4th and announced the possibility of more such larger increases. The Bank of England has agreed to raise interest rates four times since December.
The prospect of rapid increases has caused panic in stock markets, as higher interest rates would raise the returns of less risky alternatives to stocks and could make credit more expensive for businesses.
European Central Bank President Christine Lagarde said the path of increases would be “gradual but sustainable” after September.
“High inflation presents a major challenge to all of us,” the bank said in the policy statement. “The board will make sure that inflation returns to its 2% target over the medium term.”
By raising its standards, the bank can influence what financial institutions, businesses, consumers and governments have to pay to borrow the money they need. So higher rates can help cool an overheated economy.
But higher rates can weigh on economic growth, making the ECB work a delicate balancing act between eliminating high inflation and not impeding economic activity.
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