The ECB will discuss a possible rate hike at its meeting on Thursday.
(Photo: dpa)
Frankfurt Speculations about a possibly stronger interest rate hike by the ECB clearly supported the euro exchange rate on Tuesday. The common currency temporarily rose by more than one percent to $ 1.0262. The agencies Reuters and Bloomberg, citing insiders, had reported that a possible increase of half a point should also be discussed at the council meeting on Thursday.
In the past few weeks, several council members such as the central bank governors from Latvia, Lithuania and Austria have openly spoken out in favor of such a larger increase. The head of the Latvian central bank, Martins Kazaks, declared at the end of June that, from his point of view, a weighted forward increase in interest rates could make sense, including a larger rate hike in July. Statements by the governors of the Belgian and Dutch central banks also indicate flexibility here. In the Bundesbank, too, there is sympathy for such an aggressive approach.
Proponents argued that a strong signal in the fight against inflation was needed now to prevent inflation expectations from getting out of hand. However, the fact that the ECB explicitly stated at its Council meeting in June that it intends to raise interest rates by a quarter of a percentage point, i.e. 25 basis points, in July speaks against this. In addition, it held out the prospect of a further sharper hike for September.
Central bank President Christine Lagarde only reaffirmed these plans at the end of June. “If the ECB raises interest rates by 50 basis points in July despite the explicit instructions for an increase of 25 basis points, communication will be very difficult,” says Frederik Ducrozet, ECB expert at Swiss asset manager Pictet.
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However, he is in favor of abolishing the so-called forward guidance, i.e. the orientation on future monetary policy. This was introduced as an additional instrument by the central bank when inflation in the euro area was very low and interest rates had reached the zero limit. The aim was to influence market expectations about future interest rates.
Inflation is well over two percent
Currently, however, inflation is well above the level of two percent targeted by the ECB. In June it reached 8.6 percent in the euro area, the highest level since the start of monetary union. From the point of view of critics, it is rather a hindrance in this environment to commit to a specific monetary policy course well in advance. In December 2021, for example, the ECB originally intended to let its bond purchases run until at least October – which would have de facto ruled out a rate hike until then. She then had to correct this line.
Some experts believe that a stronger rate hike by the ECB could also support the euro exchange rate in the long term and thus also dampen the risk of inflation. The euro had recently lost significantly in value compared to the US dollar and had fallen below parity, i.e. the mark of one dollar per euro. This in turn tends to increase inflationary pressures because many imports such as oil and other commodities are priced in dollars. This means that if the euro exchange rate falls, import prices rise, which further increases the price pressure.
However, the dollar has appreciated not only against the euro, but also against other major currencies. The dollar index, which reflects the exchange rate of the dollar against six other major currencies, recently reached its highest level in 20 years.
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