“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 in a statement following a policy meeting in Amsterdam.

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 percentage point, or 50 basis point move, in July.

In a detailed policy statement, 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.”

ECB President Christine Lagarde, in a news conference, reiterated the statement’s language around a potentially outsize September hike, saying that the ECB would deliver a half-point move if medium-term inflation expectations remain unchanged or deteriorate. As for July, she argued that a gradual approach to the start of the cycle was warranted given a high degree of economic uncertainty.

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 turning back south, falling 0.3% versus the U.S. dollar to $1.0686. 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
TMBMKDE-10Y,
1.438%
jumped 7 basis points to 1.427%, hovering at a level not seen since 2015. The yield on the Italian 10-year bond
TMBMKIT-10Y,
3.580%
surged nearly 19 basis points to 3.552%, hovering around a level not seen since 2018.

Widening spreads between yields on German bonds and those of Italy and other so-called peripheral eurozone countries have raised alarm bells. Lagarde said the ECB “must make sure” there is no fragmentation of the transmission of its monetary policy across the eurozone and emphasized the role that the reinvestment of proceeds from assets rolling off its previously ended pandemic emergency purchase program could be adjusted. Lagarde also said the ECB could tweak existing or bring in new instruments if necessary.