Christine Lagarde signals clear ECB rate hike in July

Christine Lagarde hinted that she would support raising the ECB’s key interest rate in July, leading economists to announce that the first rate hike in more than a decade will almost certainly go ahead.

European Central Bank President a speech In Slovenia on Wednesday, she expected the bank to stop expanding its balance sheet by buying bonds “at the beginning of the third quarter” before raising interest rates “for a while” thereafter, which “may mean only a few weeks.”

Lagarde added that “actions that demonstrate our commitment to price stability” will be crucial to ensure that business and household expectations for future inflation do not rise further and test the credibility of the central bank.Eurozone inflation takes a hit a record It was 7.5% in April – almost four times the central bank’s 2% target.

The comments made it clear that Lagarde supports a growing number of council members calling for a 25 basis point rate hike rise The ECB’s deposit rate at its July 21 policy meeting. The deposit rate is now minus 0.5%, having been in negative territory since 2014, when it was cut to help deal with the region’s debt crisis.

Economists have been predicting in advance when the central bank will raise interest rates. A 25 basis point hike in July will be the first of seven moves to raise the deposit rate to 1.25% next year, UBS’s Reinhard Cluse forecast on Wednesday. Frederik Ducrozet, a strategist at Pictet Wealth Management, wrote on Twitter that the ECB’s July rate hike appears to be “a foregone conclusion.”

ECB officials are increasingly concerned that the fallout from Russia’s invasion of Ukraine will keep inflation high for longer and implant expectations of higher prices among consumers and businesses.

Lagarde said the war “could accelerate two ongoing structural changes that, in the interim, could lead to further negative supply shocks and cost pressures”.

The ECB’s new quarterly forecasts, due in June, “increasingly point to inflation on target at least over the medium term,” she added. European Central Bank Deputy President Luis de Guindos predicted that inflation in the euro zone will be as high as 5% by the end of the year, up from a forecast in March of 4% for the fourth quarter of the year.

Several other ECB Governing Council members have speak out They have indicated in recent days that they will support a series of rate hikes starting in July, and most of the 25 rate-setting bodies appear to support such a move.

Fabio Panetta, the most dovish member of the executive committee, was the only one opposed to a rate hike in July, preferring to wait until a week later to release second-quarter growth figures. Austrian hawkish central banker Robert Holzmann even said a rate hike in June is likely, even though he is seen as an outlier.

Frank Elderson, the newest member of the ECB’s executive board, who joined in January, said earlier on Wednesday that it could consider raising interest rates in July “as always, depending on upcoming data.” He added that if the conflict in Ukraine does not escalate, there will be no recession in the euro zone.

The hawkish turn brings the ECB closer to the Federal Reserve and the Bank of England, both of which have recently raised interest rates. However, monetary policymakers in the euro zone remain well behind their US and UK counterparts in the rate hike cycle and are the only of the three to use negative rates as a policy tool.

Lagarde said the Ukrainian war “poses a challenge to monetary policy by moderating growth rates and further driving up inflation”.

While “the deflationary dynamics of the past decade seem increasingly unlikely to return”, she said consumption and investment in the euro area were still below pre-pandemic levels, meaning the ECB was aiming to “normalize” rather than “Tightening” monetary policy – a sign that it will only raise rates slowly to continue to support activity.

“After the first rate hike, the normalization process will be gradual,” she said, adding that “flexibility will be key” – referring to a possible “new tool” the central bank has discussed to help Cope with a sudden spike in a country’s borrowing costs by buying its bonds.

Last week, investors demanded that the additional borrowing cost of holding Italian debt was higher than German debt by more than 2 percentage points for the first time in nearly two years, underscoring that tighter monetary policy by the European Central Bank will mainly affect euro zone countries with higher debt burdens. ‘s concerns.

Some ECB officials have said there is little chance of raising interest rates to address supply constraints that have pushed up energy and food prices, but board member Isabel Schnabel said in Vienna on Wednesday that buoyant demand was also to blame for high inflation.

U.S. household savings rose by $270 million and the euro zone by 900 billion euros during the pandemic, Schnabel said, allowing businesses to raise prices, adding that it was “time to end the measures that have been launched” in the fight against low inflation”.

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