Several monetary watchdogs have already envisaged a turnaround in interest rates for July.
(Photo: Reuters)
Frankfurt ECB Council member Klaas Knot believes a sharp rise in interest rates in the euro area is possible in July if inflation continues to rise. “In this case, a logical step would be half a percentage point,” said the Dutch central bank governor in a television interview. This makes him the first ECB representative to bring an interest rate hike of this magnitude into play. In the past, the ECB had emphasized that it intends to proceed step by step in normalizing its monetary policy.
However, Knot currently considers a rate hike of a quarter of a percentage point to be realistic for July. The comment caused a stir in the markets. The euro exchange rate increased by one percent on Tuesday afternoon.
In the past few weeks, many ECB representatives have already signaled a rate hike in July. ECB President Christine Lagarde said that the central bank’s bond purchases would expire in the third quarter and that the first interest rate hike could follow “a few weeks later”. In a recent interview with the Handelsblatt, ECB Executive Board member Isabel Schnabel also said with regard to the high inflation: “Now it’s not enough to talk, we have to act.” She thinks a rate hike in July is possible.
The deposit interest rate, which is decisive for monetary policy, is currently minus 0.5 percent. This means that banks have to pay negative interest on excess funds that they hold at the central bank. According to a Reuters poll, 90 percent of the economists surveyed assume that the deposit rate will be zero or higher by the end of the year.
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Knot’s comments indicate that the ECB could tighten its monetary policy even faster than previously expected. In the USA, too, the Federal Reserve‧ raised interest rates by 0.5 percentage points at the beginning of May. The key interest rate there is now in a corridor of 0.75 to 1.0 percent.
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