The European Central Bank (ECB) is to end a decade of zero or negative interest rates next month when it will raise the cost of borrowing by 0.25 per cent.
The Governing Council of the Eurozone’s central bank said there would be a further hike in September, the scale of which will be determined by the medium term inflation outlook.
Beyond that the ECB expects that “a gradual but sustained path of further increases in interest rates will be appropriate” to bring inflation back to its target of two per cent.
The ECB’s chief Economist Philip Lane is said to prefer a 25-basis-point moves in July and September but others at the bank have been arguing for a half point to be considered for ther first time in more than 20 years.
In its statement the ECB, which acts for 19 countries that use the Euro, also said its economists expect Eurozone inflation to hit 6.8% in 2022, before falling to 3.5% in 2023 and 2.1% in 2024 – higher than its March projections.
It said: “In May inflation again rose significantly, mainly because of surging energy and food prices, including due to the impact of the war. But inflation pressures have broadened and intensified, with prices for many goods and services increasing strongly.”
The statement added: “This means that headline inflation at the end of the projection horizon is projected to be slightly above the Governing Council’s target. Inflation excluding energy and food is projected to average 3.3% in 2022, 2.8% in 2023 and 2.3% in 2024 – also above the March projections.”
GDP growth forecasts were revised downwards to 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Yesterday the OECD said the Uk’s economy would grow by 3.6 per cent this year but would flatline next year.
Hinesh Patel, portfolio manager at Quilter Investor said: “The ECB has previously been well behind the curve when it comes to tightening policy, and some extent it is holding fast still - though this finally looks to be coming to and end.”