The European Central Bank plans to raise interest rates next month for the first time since 2011 after warning inflation would increase by more than previously estimated.
Resisting calls for a 0.5% increase next month, the ECB’s governing council said the base rate for the 19-member currency bloc would be raised by 0.25% with a further, and possibly larger increase scheduled for September.
The rise in July will lift the main deposit rate for commercial banks from -0.5%, and increase the 0% lending rate towards the Bank of England’s equivalent base rate of 1%.
Monthly injections of electronic funds into the economy, known as quantitative easing, will also be stopped in July, though the existing stock of ECB loans will remain at around £8tn, or 63% of the eurozone’s annual gross domestic product.
At a meeting in Amsterdam, the governing council said that inflation had become a “major challenge” and that inflationary forces had “broadened and intensified”.
According to its latest forecasts, inflation will average 6.8% this year, well above the 5.1% predicted in March, before falling to 3.5% in 2023 and 2.1% in 2024.
Officials said they were concerned that Russia’s invasion of Ukraine had hit “confidence, consumption and investment”, leaving the eurozone with a weaker growth outlook.
“It is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices. These factors will continue to weigh on confidence and dampen growth, especially in the near term,” the ECB said.
However, it was unlikely the invasion would plunge the eurozone into recession, it said, adding: “The conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong
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