(Kitco News) - The ECB leaves rates unchanged (as predicted) but increases inflation forecasts and downgrades GDP projections. Inflation issues are clearly biting the ECB as the bank has now confirmed its plan to raise interest rates. The ECB has slashed its GDP forecasts to 2.8% in 2022 and thinks 2023 growth will be at 2.1% (prev 2.8%) and 2024 could be 2.1% higher than the previously predicted 1.6%. This means the banks will end a long-running bond-buying scheme on 1st July and signal a string of interest rate hikes from July onward.
Elsewhere, inflation forecasts have been revised higher. This year the ECB believes inflation will hit 6.8% vs the previous prediction of 5.1% and next year 3.5% higher than the previous estimate of 2.1%.
The central bank has said it will hike by 25bps in July and also want to raise rates again in September. APP reinvestments are to run for an extended period of time past rate lift-off. Money markets are now pricing in 135 basis points of hikes by the end of this year, or an increase at every meeting from July, with some of the moves in excess of 25 basis points.
In a short-term reaction, EUR/USD spiked higher to nearly 1.1750 but has then since pared some of those early gains. The hourly chart below shows the volatility following the news.
