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Christine Lagarde: Deposit rate now at 1.5 percent
Photo: INTS KALNINS / REUTERS
The European Central Bank (ECB) is sticking to its rate hike course in the fight against high inflation.
The ECB may have to accept that the steps will dampen economic activity, said President Christine Lagarde at the European Banking Congress in Frankfurt am Main.
"We expect to keep raising rates -- and removing stimulus may not be enough," she said.
How far the ECB will go and at what pace will be determined by the inflation outlook.
The central bank will ensure that excessive inflation is not reflected in inflation expectations.
The next interest rate meeting of the monetary watchdogs – which will also be the last this year – is scheduled for December 15th.
Fueled by the surge in energy prices, inflation in the euro area is now in double digits.
In October, inflation was 10.6 percent – the highest level since monetary union was founded in 1999. »We assume that we will continue to raise interest rates to the level that is necessary to ensure that inflation returns to our medium-term target of two percent,” Lagarde said.
Interest rates remain the ECB's main tool
The ECB has already raised interest rates three times in the space of just a few months in the fight against the sustained surge in inflation.
In September and October, the ECB even raised the key rates by a particularly strong 0.75 percentage points.
As a result, the deposit rate that financial institutions receive from the central bank for parking excess funds and which is considered the most important interest rate on the financial market is now 1.5 percent.
In June, this was still minus 0.5 percent – which meant penalty interest for the institutes.
At a level of 1.5 percent, the rate is now on the verge of the so-called neutral interest rate, which neither slows down nor encourages an economy.
Because most estimates by economists for the neutral interest rate are between 1.5 and 2.0 percent.
After an expected interest rate hike in December, the ECB's monetary policy stimulus measures should then come to an end.
In her speech, Lagarde also made it clear that the ECB will also tackle the reduction of its bond portfolios, which have swollen as a result of the years of purchase programs.
“Interest rates are and will remain the main tool for adjusting our monetary policy stance,” said the central bank governor.
However, the ECB must also adjust its other instruments and in this way strengthen the monetary policy impulses through the interest rate policy.
It is appropriate to normalize the central bank's balance sheet in a measured and predictable manner.
In December, the ECB will decide on important decisions, said Lagarde.
The euro central bank is initially keeping an eye on the bond holdings from the older APP bond purchase program, with which it wanted to boost the economy and inflation from 2015 onwards.
According to ECB deputy head Luis de Guindos, the central bank wants to start shrinking in the coming year.
The ECB wants to continue with the flexible reinvestments in the PEPP pandemic purchase program, as Lagarde said.
For this purchase program, the ECB has so far promised that expiring bonds will be completely replaced by at least the end of 2024
Apr/Reuters
