European Central Bank plans to end negative epoch as inflation rises

Negative interest rates will soon be a thing of the past in the eurozone, the ECB chief indicated on Monday, as the bank prepares to raise rates for the first time in a decade to curb rising inflation.

The Frankfurt-based firm is “likely to be out of negative interest rates by the end of the third quarter,” ECB President Christine Lagarde wrote in a blog post.

The ECB, along with other central banks, had a clear timeline for raising rates in response to rising inflation.

Lagarde had earlier argued that the sharp jump in consumer prices, which in part was driven by the erosive effects of the Covid-19 epidemic, could subside in a few months.

But Russia’s war operations in Ukraine have thrown a new spanner in the works, worsening the already disrupted supply chain and creating new shortages of essential materials, from wheat to metal.

Western economies, including Germany – the eurozone’s largest – have been pushing for a break from Russian power, pushing up energy prices.

Consumer prices in the eurozone rose 7.5 percent in April, the highest ever for a currency club and above the bank’s two-percent target.

The renewal wave has already provoked a sharp response from many central banks.

The US Federal Reserve raised rates by an unusually large 50 basis points in early May, while the Bank of England sealed its fourth consecutive rise.

The euro rose one percent against the dollar after Lagarde’s remarks, as the Fed struggled to act more aggressively in the fight against inflation.

– The first increase – the completion of the ECB’s bond-buying stimulus program “early in the third quarter” will pave the way for a “rate lift-off at our meeting in July”, Lagarde said.

Early growth will lift rates from their current historically low levels.

This includes a minus 0.5 deposit rate that effectively charges banks to park their excess cash in the ECB overnight.

Any elevation beyond zero will depend “on the outlook for inflation,” Lagarde said.

If the forecasted rate of inflation appears to be stable near the ECB’s two-percent target, further increases would be “appropriate”.

Policymakers are keeping a close eye on wage growth, fearing that wage increases could push up inflation further.

Wage growth was “moderate” in the first quarter of 2022, the German central bank said in a report released on Monday.

But the Bundesbank has warned that the cost of living ballooning could lead to “strong growth” in Europe’s largest economy in the near future.

Following Lagarde’s remarks, Michael Schubert, a senior economist at Commerzbank, said he expected the ECB to raise the deposit rate by 25 basis points in each of its seven meetings between July and April next year.

The hike streak will bring the core rate to 1.25 percent, he said, but warned that the ECB would have to go further to bring inflation under control.

ECB policymakers will meet next June 9 and July 21 to determine their course of action, with July being the most likely date for the first increase.

Leave a Reply

Your email address will not be published.