The European Central Bank (ECB) sent a wave of relief across the markets, after the institution announced it would be raising interest rates for the first time in 11 years, with a 25 basis points hike scheduled for its July meeting after maintaining current rates throughout June.
The interest rates increase is set to kick off after the ECB formally ends its purchases of net assets on 1 July this year.
The ECB confirmed that the governing council intended to continue reinvesting in the principal payments from maturing securities purchased under the APP for an extended term beyond the date when it begins to raise the key ECB interest rates, and for as long as required to maintain decent liquidity conditions and the requisite monetary policy stance.
The Bank is set to keep interest rates for June on deposit facility, main refinancing operations and marginal lending facility at minus 0.5%, 0% and 0.25%, respectively.
The ECB also downgraded its growth forecast, with the Eurozone currently facing record levels of inflation at 8.1% at the close of May, four-times its target level, linked to soaring food and energy crisis as a result of the Ukraine conflict.
Inflation is currently projected at 6.8% for 2022, with a decrease to 3.5% in 2023 and a drop to 2.1% in 2024.
Meanwhile, the Eurosystem is expected to see an annual real GDP growth at 2.8% in 2022, followed by a 2.1% rise in 2023 and a 2.1% increase in 2024.
The organisation indicated an additional interest rates hike at its meeting in September, however it mentioned that the level of its increase depended on the trajectory of the medium-term inflation projections.
“Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate,” the ECB said in a statement.
“In line with the Governing Council’s commitment to its 2% medium-term 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.”
Analysts pointed out the positive reaction the ECB confirmation sparked in the markets, with its decision to keep rates at their current level met with an uptick in optimism going forward in 2022.
“With inflation in the eurozone more than 4 times higher than the 2% target it was no surprise to see the ECB maintain their key rates at current levels at their meeting today,” said ZEDRA global head of Fiduciary Investment Services Toby Sturgeon.
“Markets reacted positively with the Euro appreciating in the immediate aftermath of the decision.”
“The focus was more on the on the potential for future rate hikes rather than today’s news as it looks increasingly likely that July will see a 25bp increase in base rates with the potential for 2 two further 25 bp increases at future meetings.”