End of net asset purchases to stimulate the economy from 1 July and, three weeks later, on 21 July, interest rates rise by 25 basis points (yesterday they remained unchanged at 0, -0.25% and -0, 50%) for the first time since 2011, followed by a further rise at the meeting on September 8, which could be even higher, by half a percentage point, if inflation does not cool. Then we will proceed with a gradual but sustained purchase. The European Central Bank unanimously reverses courseafter the massive stimulus plan launched to counter the effects of the pandemic, and initiates monetary normalization to curb the price rush.
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With inflation shot up to 8.1% in May on average in the euro areathe situation seems to get out of hand, due to the sharp rise in energy prices due to Russia’s war on Ukraine, but also due to the continuing shocks on the supply side, caused by the persistence of bottlenecks in supply chains due to new lockdowns decided by the zero Covid policy in China.
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Just a few months ago, the president of the ECB, Christine Lagarde, considered a rate hike this year very unlikely. Instead there will be at least two. That the central bank has been displaced is evident in the new economic estimates, which drastically correct the values indicated in March. Now Frankfurt estimates that inflation will rise to 6.8% this year in the euro zone on average compared to the 3.3% forecast a few months ago., to then drop to 3.5% in 2023 and 2.1% in 2024. Excluding energy and food, inflation will be 3.3%. As for growth, the increase in GDP in the eurozone will stop at 2.8% on average this year, and then slow down at 2.1% in the following two years. We will ensure that inflation returns to our 2% target over the medium term, Lagarde said at the traditional press conference following monetary policy decisions. It’s not just a step, it’s a journey, he explained.
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But when the French lawyer was asked to clarify the hypotheses circulated in recent days of a possible new anti-spread shield to take away pressure on the government bonds of the most indebted peripheral countries, such as Italy and Spain, the lack of details was not well received by the markets and pushed yields further up after the tensions of recent days. The spread of the ten-year BTP on the German Bund has widened to 229 points, The highest level since May 2020, while the yield reached 3.73%.
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Stock markets are also bad: Piazza Affari fell by 1.6%, the worst in Europea, where the main lists ended the session down. Investors were not satisfied with the decision of the ECB to continue to reinvest the securities, purchased under the App program, maturing in its portfolio, for an extended period of time, beyond the date on which it will begin to raise the reference interest rates , and those of the Pepp program linked to the pandemic emergency at least until the end of 2024.
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