Eurozone interest rates to rise for first time in a decade

·2-min read

The European Central Bank (ECB) will raise interest rates next month for the first time in 11 years in a bid to control soaring inflation, ending a stimulus scheme to support the economy during the Covid-19 pandemic.

The ECB said on Thursday it would raise its key interest rates by 0.25 percent in July, with another hike in September.

The bank also intends to end its bond-buying stimulus programme on 1 July.

The bank’s 25-member monetary policy council, which met in Amsterdam, said inflation had become a “major challenge” and that those forces had “broadened and intensified” in the 19 countries that use the euro currency.

Consumer prices in the eurozone rose by a record 8.1 percent in May, well above the ECB's target of 2 percent.

Inflation in France in April was at 4.8 percent, with the Insee statistics institute predicting it will hit 6 percent this month.

"High inflation is a major challenge for all of us. The [ECB] governing council will make sure that inflation returns to its 2 percent target over the medium term," the ECB said in a statement.

The ECB's main policy interest rate is running at -0.5 percent.

The bank said it could be back to zero or higher by the end of September depending on whether the inflation outlook persists or deteriorates.

The last time it raised interest rates was in 2011.

No immediate drop in inflation

ECB president Christine Lagarde said the July interest hike would not have an immediate impact on inflation, which would remain "undesirably elevated for some time".

Russia's war in Ukraine has pushed up energy prices, particularly in Europe, which relies on Russian oil and natural gas.

The war is “disrupting trade, is leading to shortages of materials and is contributing to high energy and commodity prices" Lagarde said.

Energy prices had increased by 40 percent compared to last year, she said, while food prices had gone up by 7.5 percent in May.

Several other central banks have already begun raising interest rates to try and slow inflation.

The US Federal Reserve raised its key rate by a half-point in May and has held out the prospect of more of those larger increases.

The Bank of England has approved rate hikes four times since December.

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