Change of monetary policy. The ECB announced this Thursday a first rate hike of 0.25 points in July, breaking the trend of the last decade, and the end of public debt purchases started at the beginning of the pandemic, given the price hike reflected in record inflation figures in the eurozone. In any case, the ECB states in relation to the pandemic emergency purchase program (PEPP): “Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic” .
“High inflation is a great challenge for everyone,” says the Governing Council of the European Central Bank (ECB), which states that “it will ensure that inflation returns to its 2% target in the medium term.”
“In May, inflation increased significantly again, mainly due to the increase in energy and food prices, also due to the impact of the war”, says the body chaired by Christine Lagarde: “But inflationary pressures have intensified , with a strong increase in the prices of many goods and services”.
Thus, the ECB has significantly revised its inflation projections upwards: “These projections indicate that inflation will remain high for some time. However, moderation in energy costs, easing of pandemic-related supply disruptions and normalization of monetary policy are expected to lead to a decline in inflation.
The new projections of the ECB foresee an annual inflation of 6.8% in 2022, and that it decreases to 3.5% in 2023 and 2.1% in 2024: “This means that headline inflation at the end of the horizon is expected to projection is slightly above the objective of the Governing Council [del 2%]”.
The ECB forecasts that inflation, excluding energy and food, will average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024, also above the March projections.
“Russia’s unjustified aggression towards Ukraine continues to weigh on the economy in Europe and the rest of the world,” says the ECB: “It is disrupting trade, causing material shortages and contributing to rising energy and commodity prices.” . These factors will continue to weigh on confidence and hold back growth, especially in the short term. However, the conditions are in place for the economy to continue growing due to the reopening of the economy, a solid labor market, fiscal support and savings accumulated during the pandemic.”
Thus, the ECB is confident that “once the current headwinds subside, economic activity is expected to pick up again.”
In this way, its projections foresee an annual growth in the GDP of the eurozone of 2.8% in 2022; 2.1% in 2023; and 2.1% in 2024. Compared to the March projections, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up.
Taking these growth and inflation projections into account, the ECB has decided to end “net asset purchases under its asset purchase program (APP) from July 1, 2022. The Governing Council intends to continue to reinvest, in full, the principal payments of maturing securities acquired under the APP for an extended period of time, after the date on which the official ECB interest rates begin to rise and, in any event, during as long as necessary to maintain ample liquidity conditions and an adequate monetary policy stance”.
Regarding the Pandemic Emergency Purchase Program (PEPP), “in the event of renewed pandemic-related market fragmentation, PEPP reinvestments can be flexibly adjusted based on timing, classes of assets and jurisdictions [los países] anytime. Net purchases under the PEPP could also be resumed, if necessary, to offset negative shocks related to the pandemic.”
As for rates, “the Governing Council intends to increase the ECB’s official interest rates by 25 basis points at its monetary policy meeting in July. In the meantime, the Governing Council has decided to keep the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility unchanged at 0.00%, 0.25 % and -0.50%, respectively”.
Looking ahead, “the Governing Council expects to raise the ECB’s official interest rates again 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 increase at the September meeting will be appropriate.”