ECB President Lagarde signals interest rate hike in July

Created: 05/23/2022, 13:05

By: Patricia Huber

The ECB is preparing the markets for the first rate hike in July.

However, exiting the ultra-loose monetary policy that has been in place for years will take some time.

Frankfurt/Main - The European Central Bank (ECB) is heading for the first rate hike in eleven years.

An end to the net purchases of securities is to be expected “very early in the third quarter”, wrote ECB President Christine Lagarde in an article published by the central bank on Monday.

"This would allow us to raise interest rates at our July meeting, in line with our forecasts." The July meeting of the Governing Council is scheduled for July 21st.

"Based on the current outlook, we will likely be able to end negative interest rates by the end of the third quarter," Lagarde announced.

European Central Bank: Record inflation calls for action

Currently, banks have to pay 0.5 percent interest when parking money at the ECB.

Because of this negative deposit rate, many institutes charge their customers a so-called custody fee for certain sums in the account.

The key interest rate in the euro zone has been at a record low of zero percent since March 2016.

This main refinancing interest rate has been superseded in importance by the deposit rate in recent years.

Record inflation in the euro area is forcing Europe's monetary authorities to take countermeasures.

In April, consumer prices in the currency area rose by 7.4 percent compared to the same month last year.

Inflation thus remained at the highest level since the introduction of the common currency.

The ECB is aiming for stable prices in the medium term with an annual inflation rate of 2 percent.

"Once inflation stabilizes at 2% over the medium term, a gradual further normalization of interest rates towards the neutral rate will be appropriate," Lagarde said.

"However, the pace of policy adjustment and its endpoint will depend on how the shocks unfold and what the medium-term inflation outlook plays out going forward."

ECB: monetary policy between inflation and economic growth

For the ECB, the exit from the ultra-loose monetary policy, which has been ultra-loose for years, is a balancing act: higher interest rates help to dampen inflation, but can also slow down economic growth.

"Should the euro area economy overheat as a result of a positive demand shock, it would make sense to gradually raise policy rates above the neutral rate," Lagarde wrote.

"This would ensure that demand comes back into line with supply and inflationary pressures ease."

The neutral interest rate represents a kind of equilibrium interest rate in which neither inflation nor economic growth develop an overweight.

For the USA, economists currently estimate the neutral interest rate at around 2.5 percent.

It is usually set significantly lower for the euro area.