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Market Extra: The ECB signals it will end era of negative interest rates as it prepares first rate hike since 2011


The European Central Bank is preparing for liftoff, announcing Thursday that it will end monthly asset purchases on July 1 and likely lift key interest rates by a quarter of a percentage point next month as it vowed to bring surging inflation back to target.

Policy makers also left the door open to a larger rate increase in September. ECB President Christine Lagarde was due to hold a news conference at 8:30 a.m. ET.

A decision to end the asset purchases, which make up a practice known as quantitative easing, was widely expected alongside a signal for interest-rate rises, though some economists had been looking for policy makers to leave the door open to a half-point, or 50 basis point move, in July.

In its policy statement following a meeting in Amsterdam, the ECB Governing Council said it expected to raise rates again in September, with the size of the move to depend on an updated medium-term inflation outlook. “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting,” they said.

“We suspect this means they expect a 50 [basis point] hike to be needed at that point” in September, said Andrew Kenningham, chief Europe economist at Capital Economics, in a note. ” This would be in line with what investors are currently pricing in and in line with our prior view, albeit we had previously penciled in the 50bp hike coming in July rather than September.”

Beyond September, the ECB said it anticipates that a “gradual but sustained path of further increases in interest rates will be appropriate.”

The ECB said inflation pressures “have broadened and intensified, with prices for many goods and services increasing strongly.” Eurosystem staff revised their baseline inflation projections up significantly, the ECB said, indicating inflation will remain “undesirably elevated for some time.”

“High inflation is a major challenge for all of us. The Governing Council will make sure that inflation returns to its 2% target over the medium term,” the ECB said.

The new staff projections see annual inflation at 6.8% in 2022, declining to 3.5% in 2023 and 2.1% in 2024 — higher than in the March projections.

The euro fluctuated in the wake of the announcement before finding its footing to rise 0.2% versus the U.S. dollar

to $1.0745. The euro has tumbled more than 5% versus the U.S. currency in 2022 as the Federal Reserve moved early this year to end its bond buying and begin lifting interest rates.

European government bonds sold off, driving up yields.

The yield on the 10-year German bund

jumped 6 basis points to 1.421%, hovering at a level not seen since 2015. The yield on the Italian 10-year bond

surged 11 basis points to 3.473%, hovering around levels not seen since 2018.

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