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This will be the first increase in the ECB’s interest rate since 2011, when the unfortunate move to tighten policy after the financial crisis was quickly reversed, as much of the continent was still in severe economic distress. Its deposit rate was negative for the first time in 2014.
The planned rise in interest rates comes despite the fact that the Frankfurt institution has lowered its economic growth forecasts for this year and next. It now expects growth of 2.8 percent this year and 2.1 percent next year, down from 3.7 percent and 2.8 percent, respectively. However, growth in 2024 is expected to be 2.1 percent, above the previously forecast 1.6 percent.
The recovery of the euro area was first derailed by the omicron wave of Covid, and now by the Russian invasion of Ukraine, which revealed the strong dependence of countries, including Germany and Italy, on Moscow.
Ms Lagarde said: “In the near future, we expect the activity to be hampered by high energy costs, deteriorating trade conditions, greater uncertainty and the detrimental impact of high inflation on disposable income.
“The war in Ukraine and renewed restrictions on the pandemic in China have again exacerbated supply bottlenecks. As a result, companies are facing higher costs and disruptions in their supply chains, and their prospects for future production have deteriorated.
The ECB has progressed more slowly than other major central banksoperating behind the Bank of England, which initially raised interest rates in December, and the US Federal Reserve, which rose in March due to the dangerous situation in the eurozone economy.
Ms Lagarde said it was important to pay a lot of attention to the rise in interest rates and move only slowly, as the economy is not used to increasing borrowing costs.
“It is good practice to start with a gradual increase, which … is not excessive,” she said, which “indicates the path” that politics will follow in the future.
There are risks that food and energy price inflation will remain high for some time to come and that the capacity of companies could be permanently affected, which will be detrimental to the economy for a long time, the ECB president warned.
“The risks associated with the pandemic have diminished, but the war is still a significant negative risk to growth. A particularly high risk would be further disruption of energy supply in the euro area, “she said.
“Furthermore, if the war escalated, the economic mood could deteriorate, supply-side constraints could increase, and energy and food costs could remain persistently higher than expected.”
Economist Carsten Brzeski of ING said raising the interest rate was a well-balanced decision by the ECB.
“As inflation heats up and the eurozone economy slows and faces stagnation or even recession, the ECB’s monetary policy normalization window is narrowing almost day by day,” he said.
“The ECB has just announced the end of a long period. Whether this will also be the beginning of a new era of ever-rising interest rates is far from certain. “
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