After the most recent interest rate meeting, the head of the ECB did not repeat her earlier assessment that a turnaround in interest rates in 2022 was very unlikely.
(Photo: Reuters)
Frankfurt/Berlin In view of the rampant interest rate fantasies in the euro zone, the head of the European Central Bank (ECB), Christine Lagarde, has dampened fears of inflation. The chances have increased that the inflation rate will stabilize around the ECB target of 2.0 percent in the medium term, emphasized the Frenchwoman on Monday at a hearing before the Economic and Monetary Affairs Committee of the European Parliament.
There are no signs that inflation will become persistent and well above target over the medium term, which would require “significant tightening” of monetary policy. Rather, one can assume that the previously loose line will normalize, she said on her website.
After the most recent interest rate meeting, Lagarde did not repeat her earlier assessment that a turnaround in interest rates in 2022 was very unlikely. The ECB left the key monetary policy rate at a record low of 0.0 percent. At the same time, banks must continue to pay penalty interest if they park excess funds at the ECB: the so-called deposit rate remained at minus 0.5 percent.
The markets are expecting an increase of half a percentage point for this year. However, many economists do not expect a first tightening step until the end of this year or early 2023.
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At the end of 2022, inflation will probably remain above the ECB’s target value, but will no longer reach the current high level, Lagarde predicted. Surprisingly, inflation in the euro area climbed to 5.1 percent in January, further surpassing the ECB target. According to Lagarde, however, the ECB must first stop its bond purchases before raising interest rates.
In view of the current uncertainty, it is more important than ever to retain flexibility and options in monetary policy, stressed the ECB President. The central bank remains “absolutely unshakable” in its mandate to ensure price stability.
ECB Governing Council members anticipate an earlier turnaround in interest rates
There was already speculation on the markets that there could be a first rate hike in July. According to the head of the Latvian central bank, Martins Kazaks, the ECB’s bond purchases must be scaled back at an “extreme and incredibly fast pace”.
According to insiders, some monetary authorities wanted to take steps to curb inflation at the most recent meeting. Should inflation not cool down noticeably, a decision at the March meeting is now likely, said two people familiar with the situation. A faster reduction in the bond purchases of the so-called APP program will then be examined.
The bond purchases via the PEPP pandemic emergency program will end in spring. To ensure that the financial markets are not left dry after the large-scale program expires in April, the ECB decided in December to allow the smaller APP program to continue in a modified form. However, the monetary watchdogs deliberately left the end of this period, which is considered a prerequisite for the turnaround in interest rates, open.
More: New signals, but no clear message: The ECB is playing for time