In a blog post, the head of the European Central Bank, Christine Lagarde, announced for the first time with relative precision when key interest rates in the euro area are to be raised. Apparently, the end of the third quarter of 2022 is now being targeted – i.e. September.
“With the inflation outlook having shifted notably upwards compared with the pre-pandemic period, it is appropriate for nominal variables to adjust – and that includes interest rates. This would not constitute a tightening of monetary policy; rather, leaving policy rates unchanged in this environment would constitute an easing of policy, which is not currently warranted,” writes Lagarde. Most recently the inflation in the eurozone reached 7.5%.
“Exit negative interest rates by the end of the third quarter”
And further: “Against the backdrop of the evidence I presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”
It is now clear when the ECB will abandon its zero interest rate policy of recent years in order to react to the high inflation. Lagarde, who for a long time did not want to admit that the COVID-19 crisis will lead to increased inflation, currently assumes a core inflation rate of 3.5% in April. However, this core inflation rate excludes food and energy prices, which are subject to particularly high fluctuations. However, energy and food are also those things that hit consumers very quickly and hard when prices are high.
Supply bottlenecks, sluggish demand, the Ukraine war, and the zero-COVID policy in China – in her blog entry, Lagarde names a whole range of well-known reasons for the high inflation. However, her analysis does not go into the consequences of the enormous corona aid from the EU and the USA for the ailing economy – and thus does not raise the question of how the COVID aid, which many refer to as “money printing”, unites had an impact on the euro. This could soon reach parity with the strong US dollar again.
Purchase programs expire in July/August
Lagarde leaves it open how long the ECB intends to deviate from the zero interest rate policy. The ECB’s target of keeping inflation at 2% or less is clear. “If we see inflation stabilizing at 2% over the medium term, a progressive further normalization of interest rates towards the neutral rate will be appropriate. But the speed of policy adjustment, and its end point, will depend on how the shocks develop and how the medium-term inflation outlook evolves as we move forward,” said Lagarde.
As reported several times, the ECB must first phase out its purchase programs, through which money is pumped into the economy. The so-called Asset Purchase Program (APP), which dates back to the pre-Corona period, is still running until August. PEPP (i.e. the Pandemic Emergency Purchase Program) ended at the end of March 2022. This clears the way for the turnaround in interest rates.
Currently, the interest rate on the main refinancing operations, the interest rates on the marginal lending facility, and the deposit facility are unchanged at 0.00%, 0.25%, and -0.50%, respectively.