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 With a view to a turnaround in interest rates, the head of the European Central Bank (ECB), Christine Lagarde, wants to show as little of her cards as possible for the time being. In view of the current uncertainty, it is “more than ever” important to retain flexibility and options in monetary policy, emphasized the Frenchwoman on Monday at a hearing before the Economic and Monetary Affairs Committee of the European Parliament.
The ECB remains “absolutely unwavering” in its mandate to ensure price stability. She sees chances that the currently high price pressure will subside and that inflation will not take hold. This makes it possible for the ECB to achieve its inflation target of 2.0 percent in the medium term.
In view of the surprising rise in inflation at the beginning of the year, Lagarde did not repeat her earlier assessment after the most recent interest rate meeting, according to which a turnaround in interest rates in 2022 was very unlikely. In January, inflation in the euro area surprisingly climbed to 5.1 percent, further surpassing the ECB’s target of 2.0 percent. According to Lagarde, however, the ECB must first stop its bond purchases before raising interest rates.
The President of the Austrian Central Bank, Robert Holzmann, recently questioned this plan. He advocates not waiting until the end of the bond purchases to raise interest rates. In an interview with the Frankfurter Allgemeine Zeitung, he said: “In my view, the now intensifying discussion within the Governing Council about monetary policy steps in the coming months is to be welcomed and correct.”
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Several members of the Governing Council of the ECB expect interest rates to turn around earlier
Recently, several members of the ECB council have spoken out in favor of faster rate hikes by the ECB – in addition to Holzmann, the Dutch ECB council member Klaas Knot and the Latvian central bank president Martins Kazaks.
Knot was aiming for the fourth quarter of this year. A second interest rate hike could then take place in the spring of 2023. Martins Kazaks, head of the Latvian central bank, considers it too early to name a specific month for a rate hike.
Nevertheless, the central banker assumes that the way for an interest rate turnaround could be cleared earlier. “We may act sooner than we thought we would in the past,” he told Reuters news agency in an interview published on Monday.
The Dutchman Knot primarily highlighted the differences between the euro zone and other large economic areas. The euro area is not in the same situation as the USA, where inflation is primarily due to internal reasons. In the currency area, most of the inflation comes from abroad, whereas the ECB cannot do much about it. The head of the Dutch central bank is seen as a representative of a tight line and a critic of the very loose ECB orientation.
The ECB left the key monetary policy rate at a record low of 0.0 percent at the most recent meeting. At the same time, banks must continue to pay penalty interest if they park excess funds at the ECB. The applicable 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.
More: New signals, but no clear message: The ECB is playing for time.