The ECB surprised the markets after signaling on Thursday after its board meeting in Amsterdam that it was likely to raise interest rates by half a percentage point in September, in addition to the expected quarterly increase in July. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said: “They have reversed the burden of proof. “Inflation needs to improve so that it does not rise by 50 basis points.” Critics have accused the ECB of being behind the curve after inflation plunged to 8.1 percent – more than four times the central bank’s 2 percent target – by May. The latest plans will bring eurozone monetary policymakers closer together with the US Federal Reserve and the Bank of England, which have already raised interest rates several times this year. It could leave the central banks of Japan and Switzerland as the last two major monetary authorities continue to apply negative interest rates. Lagarde and chief economist Philip Lane had previously said that interest rate hikes by a quarter of a percentage point were the “benchmark” for their July and September meetings. However, the president of the ECB stressed on Thursday afternoon that the risks to the outlook for inflation are now “mostly upward”. Central bank officials are increasingly worried that higher wages and the continued disruption of global supply chains will lead to a stabilization of inflation. The decision to announce the rise in July and the possible move of 50 basis points in September was unanimous, as the pigeons were happy to avoid a more aggressive move in the first rise in interest rates in exchange for clearly opening the door to a bigger move. in September . “Many of the tools at our disposal have been to increase inflation, but now we are in the opposite situation and we need to reduce it again,” Lagarde said on Thursday, adding that the ECB “will stay on course and be determined.” . The bank last raised interest rates in 2011 and its deposit rate now stands at minus 0.5 percent after hitting zero in July 2012 and falling to negative ground in 2014, when the region faced a debt crisis. Government borrowing costs have risen in response to the hawkish shift. The yield on Germany’s 10-year bond increased by 0.09 percentage points to 1.45%. The most risky debt was sold more intensively, with Italy’s 10-year yield rising by 0.25 percentage points to 3.62%. As planned, the bank announced it would close the remaining € 20 billion-a-month bond purchases in early July. The ECB said in a statement that its board “intends to raise key ECB interest rates by 25 basis points at its July monetary policy meeting”. He added that if inflation prospects persist or worsen, “a larger increase will be appropriate at the September meeting.” Beyond September, the ECB said it “expects a gradual but steady course of further interest rate hikes to be appropriate”. The sell-off in bond markets, however, highlighted how the ECB’s plans to abandon the stimulus of the crisis could cause problems in countries with higher debt, such as Italy. Former ECB President and current Italian Prime Minister Mario Draghi said before the meeting on Thursday that rising inflation in the EU “was not entirely a sign of overheating, but largely the result of a series of supply shocks”. There was, he said, “still surplus capacity in the economy.” Investors, meanwhile, wanted the ECB to explain what it planned to do to avoid the risk of a recurrence of financial market pressure that led to bailouts in many countries, including Greece, Portugal and Ireland, during the debt crisis. Europe in 2012. almost destroyed the single currency. Lagarde said the ECB needed to ensure an end to rising public debt and that higher interest rates would not lead to “fragmentation” of government and corporate borrowing costs in individual Member States. “We know how to design and we know how to develop new instruments, if and when necessary,” he added. “It simply came to our notice then. we will do it again “. The President of the ECB said that the bank had full flexibility to decide when and how to develop “anti-fragmentation” tools, including the possibility of reinvesting maturity securities in a € 1.7 trillion bond purchase program launched during of the pandemic, adding: “We will prevent it.” However, he declined to give further details on the conditions that could lead to the launch of a new bond-buying tool, saying: this or that. ” The gap between Italian and German 10-year borrowing costs widened to 2.17 percentage points – the largest since the early stages of the Covid-19 pandemic. “We are almost seeing hawks taking power in the ECB for a while,” said Katharina Utermöhl, senior economist for Europe at Allianz. “If there was a compromise, it was a compromise to curb the hawks rather than to please the pigeons.” Italian bonds were hit by an “unacceptable combination” of the prospect of higher interest rate hikes along with a lack of detail about any new tools to keep the cap on government bond yields, said Richard McGuire, a strategic analyst at Rabobank. “As we do not know where the point of pain is, this is absolutely a call for pressure to build.” Lagarde said on Thursday that inflation “will remain undesirably high for a period of time” after three-quarters of the data used to measure inflation rose more than 2 percent last month. The rate at which price pressures have intensified in recent months has left hawks worried that the ECB is behind the tightening curve and is calling for more aggressive moves, in line with the Fed’s 50-point key interest rate strategy. every time. As Russia’s invasion of Ukraine has already pushed up food and fuel prices for European consumers, there are also growing fears among economists that cutting off Russian gas supplies could plunge the eurozone into recession.

The ECB cut its growth forecasts and sharply increased its inflation forecasts. Eurozone inflation will rise from 2.6 percent last year to 6.8 percent this year, before falling to 3.5 percent next year and 2.1 percent next year – staying above its target of 2 percent for the entire forecast period. In March, the central bank forecast inflation of 5.1 percent this year, falling to 2.1 percent next year and 1.9 percent in two years. Growth will reach 2.8 percent in 2022, 2.1 percent in each of the next two years, well below March forecasts, he said. Carsten Brzeski, head of macroeconomic research at ING, said forecasts remained “very optimistic, which would prevent the ECB from doing what it intends to do” to tackle inflation. There has been speculation as to how quickly the ECB could start shrinking its balance sheet by not reinvesting end-to-end bond yields in the 4.9 trillion-euro portfolio it has created. However, Lagarde said the issue had not been discussed this week and would be left for a future meeting. The bank said such reinvestments would continue “for a long time after the start date of the ECB’s key interest rate hikes and, in any case, for as long as is necessary to maintain ample liquidity conditions and a proper monetary policy direction”. Additional report by Amy Kazmin