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The European Central Bank began a new era on Thursday, when policymakers announced their intention to hike interest rates for the first time in more than a decade next month.

“High inflation is a major challenge for all of us,” the bank said in a statement, as it warned that inflationary pressures had “broadened and intensified,” reaching more goods and services. Inflation, excluding volatile food and energy costs, is likely to surpass the bank’s 2 percent inflation target through 2024.

The statement was unequivocal on rate hikes, stating that the bank planned to raise its main rate by a quarter-point at its July meeting and that rates would be raised again in September. Following that, there will be a “gradual but sustained path” of further rises, according to the bank.

On Thursday, the central bank revised its economic predictions, portraying a bleak picture of growing inflation and a weakening growth outlook as the Ukraine conflict interrupts commerce and drives up energy and commodity costs. Inflation will average 6.8 percent this year, up from 5.1 percent predicted in March. The bank forecasted 2.1 percent growth this year, down from 3.7 percent previously.

“Inflation will remain undesirably elevated for some time,” the central bank said on Thursday.

The bank forecasted annual inflation of 2.1 percent in 2024, beyond the bank’s objective of 2 percent, strengthening the circumstances for monetary tightening.

The central bank’s deposit rate, which is what banks get for keeping money with the central bank overnight, is now minus 0.5 percent, which is effectively a penalty aimed to encourage banks to lend the money rather than store it at the central bank. The rate was first reduced below zero in mid-2014, when inflation approached zero.

Source: New York Times


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