The European Central Bank (ECB) has confirmed the road map drawn up in recent weeks and months with regard to the fight against inflation. Interest rates, at 0% for more than six years, will rise in July for the first time in eleven years. The governing council, meeting this morning in Amsterdam, has confirmed what was expected. "In line with the sequence of policies pursued so far, the Governing Council intends to raise key ECB interest rates by 25 basis points at its July monetary policy meeting." The fight against inflation, which is at 8.1% in the eurozone and whose medium-term prospects are high, requires a progressive withdrawal of stimuli that the ECB, now, is determined to undertake now. It is the last of the major central banks to do so, but the change in direction in monetary policy is already a reality.
In its note issued this morning, the ECB assures that the new projections forecast annual inflation of 6.8% in 2022, 3.5% in 2023 and 2.1% in 2024. "This means that headline inflation at the end of the projection horizon is projected to be slightly above the governing council's target, as 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.
Regarding GDP growth, the ECB has revised its forecasts downwards to 2.8% in 2022, 2.1% in 2023 and 2.1% in 2024. Compared with the projections of March, the outlook has been revised down significantly for 2022 and 2023, while for 2024 it has been revised up.
The change in monetary policy worries the ECB due to the possible consequences on the financing of the States, especially the most vulnerable. The rise in the yield on debt and in risk premiums could lead to a new fragmentation of the euro. This requires the ECB to step up, as the note says: "In the event of renewed pandemic-related market fragmentation, PEPP (bond purchase program) reinvestments can be flexibly adjusted depending on the time, asset classes and jurisdictions at any time. And it adds: "Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic"