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The Surge in ECB Interest Rates Set to Extend Beyond July Amid Inflation Concerns

As the European Central Bank grapples with the challenge of reigning in inflation, its policymakers hint at extending the rising trajectory of interest rates past this summer.

European Central Bank
European Central Bank

ECB Signaling Additional Rate Hikes Beyond July

The European Central Bank (ECB) may need to extend its trajectory of interest rate hikes beyond July, as policymakers aim to bring inflation back on track. This sentiment was expressed during the ECB's recent meeting, the minutes of which were made public last Thursday.

Highest Interest Rates in 22 Years as Inflation Lingers

In its June meeting, the ECB ramped up its interest rates to the highest level in over two decades. This ninth successive increase was seen as almost inevitable in July as projections suggested that inflation would remain over the 2% target until the end of 2025.

Potential Rate Increases Loom Over September Meeting

Rate increases could still be on the agenda at the ECB's next meeting slated for September 13-14, as was previously reported by Reuters. The central bank emphasizes the necessity for consistent monetary policy efforts to steer inflation back to its target promptly.

Insufficient Market Expectations Could Spur Additional Hikes

The ECB expressed that market expectations—factoring in rate hikes in June and July with a 20% probability of a subsequent 25-basis-point increase—may fall short in controlling inflation. Current trends suggest the possibility of rate cuts in the first half of 2024.

Core Prices Drive Rate Hike Discussions Despite Falling Inflation

Recent data indicates that the euro zone's economy is losing momentum, with inflation dipping for the third consecutive month in June. However, persistent increases in core prices, such as those for services, are driving discussions of a possible further rate hike by the ECB in September.

Data-Dependent Approach to Determine Future Rates

While uncertainty remains, policymakers are committed to a "data-dependent approach" and a "meeting-by-meeting optionality" in deciding future interest rates beyond July. The ECB increased borrowing costs by a quarter of a percentage point in June, though there was an initial preference for a 50 basis-point rise in key ECB interest rates.

ECB Halts Asset Replacement, Ponders Effects of Loan Repayment

In another notable move, the ECB decided to cease replacing bonds bought through its Asset Purchase Programme upon maturity. Despite a proposal to defer this decision, the bank aims to evaluate the market's response to the repayment of half a trillion-euro worth of central bank loans.