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Change of course in the summer: the boss of the ECB announces a possible turnaround in interest rates

Change of course in the summer
The boss of the ECB announces a possible turnaround in interest rates

The European Central Bank has maintained its zero interest rate policy for more than six years. In view of rising inflation in the euro area, however, ECB head Lagarde is now indicating that the benchmark interest rate will soon be hiked for the summer. However, there is no specific date yet.

ECB President Christine Lagarde is preparing financial markets for the scenario of a turnaround in interest rates in July. Bond purchases are likely to be phased out early in the third quarter, followed by a rate hike that could come “sometime later,” the Frenchwoman said at a conference in Slovenia. The ECB lowered interest rates to zero in March 2016. Recently, rumors from the European Central Bank executive level have increased, calling for an early end to ultra-loose monetary policy.

“We haven’t yet defined exactly what ‘some time later’ means,” said Lagarde. “But I made it very clear that this could be a period of a few weeks.” On 9 June the Governing Council of the ECB will discuss future monetary policy, with the next meeting to be held on 21 July. Thereafter, the Governing Council of the ECB will no longer meet for a regular monetary policy meeting until September.

In view of the record inflation in the euro area, the head of the Bundesbank, Joachim Nagel, is also calling for an intervention. It is important to act quickly to avoid second-round effects such as price and wage escalation and inflation expectations that get out of hand. The deposit rate in the euro area is currently minus 0.5%. This means that banks have to pay default interest if they park excess funds with the central bank. The key interest rate is currently 0.0%.

The pressure on the ECB to raise interest rates has recently increased due to the high rate of inflation in the euro area. It hit a record 7.5% in April. In other countries like the United States and Great Britain, central banks have already raised interest rates this year.

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