Frankfurt The expectation that the European Central Bank (ECB) will raise interest rates for the first time as early as July is gradually gaining ground. The benchmark official interest rate is currently zero, the most important interest rate for commercial bank deposits with the ECB is minus 0.5 per cent.
Such an early move would leave room for further rate hikes this year. It is relatively clear that the central bank will stop buying bonds in the summer, so that only maturing bonds will be replaced and the balance sheet total will remain stable. According to repeated statements by the ECB, this stop is a prerequisite for the rise in interest rates.
In addition to the high inflation rate of 7.5% in the euro area in March, some statements by the members of the ECB Council speak of a foreseeable rise in interest rates. Central bank deputy Luis de Guindos said in an interview that July was “live”, which can be seen as a clear signal without further explanation. And Bundesbank chief Joachim Nagel recently said the first interest rate hike could be expected in early July. The head of the Latvian central bank, Martins Kazaks, believes that up to three rate hikes are possible in the current year.
Greg Fuzesi, an ECB expert at the US bank JP Morgan, therefore expects a rate hike of 0.25 percentage points “more likely in July than in September”. This roughly matches the expectations of today’s market, as confirmed by Pilar Gomez Bravo, a bond expert at US fund firm MfS. According to Fuzesi, there should be more such passes in September and December and then four more in the next year. The interest rate on deposits would therefore be 1.25 per cent.
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Since this is still below the neutral rate of around two percent, further steps are expected in 2024, writes Fuzesi in a study. An interest rate that neither slows nor accelerates the economy is considered “neutral”, although this percentage can only be estimated. According to JP Morgan’s logic, the ECB’s policy would no longer have an expansionary effect until 2024.
Lower probability of recession in the US than in Europe
Jari Stehn, a European economist at US bank Goldman Sachs, expects bond purchases to stop at the end of June and therefore expects the same sequence of interest rate hikes as Fuzesi, up to 1.25% over the next year. . A significant economic slowdown could result in slower succession. If there are second-round effects, i.e. wage increases, which in turn drive prices up, a faster sequence is also possible.
Like the Fed in the US, the ECB is under pressure to act. The effects of the second round play a much more important role in America than in Europe. Furthermore, the United States is less affected by the war in Ukraine. An economic downturn or recession is therefore less likely than in Germany. But there are also fears in the US that too rapid a tightening of monetary policy could slow the recovery after the pandemic.
In Europe, politicians and economists are debating whether Germany and other EU countries should stop buying oil and gas from Russia. There are several studies on the matter, which predict a recession when that happens. If this were to happen, the decisions for the ECB would be even more difficult.
Moreover: Higher interest rates, more risk: why banks continue to rely on building loans