The European Central Bank on Thursday ended its bond-buying stimulus and unveiled plans for a series of interest rate increases from July, the first in more than a decade, to combat soaring inflation.
The keenly-awaited announcements bring down the curtain on the ECB's cheap money era, after policymakers faced growing pressure to catch up with other major central banks that have already moved to rein in prices.
ECB governors, exceptionally meeting in Amsterdam instead of Frankfurt, agreed as a first step to halt their multi-billion-euro bond-buying stimulus as of July 1.
The bank's governing council then plans "to raise the key ECB interest rates by 25 basis points" at its next meeting on July 21, the ECB said in a statement.
It will raise rates again in September, with the size dependent on the economic outlook.
ECB president Christine Lagarde, who said Thursday's decisions were unanimous, said the bank was embarking on "a journey" that would include "a series of moves over the course of the next months".
The last time the ECB raised rates was in 2011.
With consumer prices soaring, "the ECB officially ends its long era of unconventional monetary policy," said ING bank economist Carsten Brzeski.
Inflation in the 19-nation euro area rose to a record 8.1% in May, well above the ECB's 2% target.
The surge has largely been driven by Russia's war against Ukraine, which has pushed up the cost of energy, food and raw materials around the globe.
In updated forecasts, the ECB said it expected consumer prices to soar to 6.8% in 2022, up from 5.1% previously.
Inflation is seen easing to 3.5% in 2023 before falling back to 2.1% in 2024.
The ECB also slashed its economic growth forecast for the 19-nation club to 2.8% in 2022 and 2.1% in 2023, from 3.7% and 2.8% previously.
The weaker outlook underscores the difficult task ahead for Ms. Lagarde in finding the right balance between raising borrowing costs enough to cool inflation, without jeopardising the eurozone's already stuttering economy.
The war in Ukraine "is disrupting trade, is leading to shortages of materials, and is contributing to high energy and commodity prices," the ECB said, while renewed coronavirus restrictions in China were worsening supply chain bottlenecks.
But the ECB still saw reason for optimism.
"Once current headwinds abate, economic activity is expected to pick up again," it said.
"The conditions are in place for the economy to continue to grow on account of the ongoing reopening of the economy, a strong labour market, fiscal support and savings built up during the pandemic."
Policymakers are, however, keeping a close eye on eurozone wages, Ms. Lagarde said, in a nod to fears of a "wage-price spiral" where higher prices push workers to demand salary increases, in turn pushing prices up further.
"We're not seeing the risk of spiralling at all, but we are seeing wage increases," Ms. Lagarde said.
The July 1 end to the ECB's bond-buying scheme will draw a line under the last in a series of debt-purchasing measures worth a total of about €5 trillion ($5.4 trillion) since 2014.
Scrapping the scheme paves the way for what Ms. Lagarde has called a "lift off" in rates.
The ECB has three key rates: a main refinancing operations rate that currently stands at zero, a marginal lending facility at 0.25% and a bank deposit rate of minus 0.5% -- meaning lenders pay to park their excess cash at the ECB.
The roadmap laid out by Ms. Lagarde and the ECB sees the central bank exiting eight years of negative rates by the end of September.
The former French finance minister kept the door open to a September increase higher than 25 basis points, which would vault the deposit rate beyond zero.
The U.S. Federal Reserve and the Bank of England have already embarked on a rate-hiking cycle.
Quizzed on how the bank would respond if borrowing costs started to diverge across the eurozone, Ms. Lagarde said the ECB "will not tolerate fragmentation".
She declined to spell out what action the bank might take, saying only that "we know how to deploy new instruments if and when necessary".
The spread between Italian and benchmark German 10-year bonds is currently at its widest since the early stages of the pandemic.
