The central bank will probably raise interest rates soon.
(Photo: dpa)
Frankfurt At the European Central Bank (ECB) meeting in April, some representatives called for swift action in the face of high inflation. “Some members felt that the higher-than-expected inflation rate in March and the rise in inflation expectations to over 2 percent called for an adjustment of monetary policy to a neutral position as soon as possible,” the minutes of the meeting read.
This would mean that interest rates could be raised further relatively quickly even after an initial hike in the summer. In a recent interview with the Handelsblatt, ECB Executive Board member Isabel Schnabel explained that interest rates in the euro area are still a long way from the neutral level at which the economy will slow down.
The reason for the debates about tightening monetary policy is the high level of inflation in the euro area. The inflation rate shot up in April at 7.4 percent, well above the ECB’s target of two percent.
In the past few weeks, several leading ECB officials have already signaled an initial interest rate hike for July. At its next meeting on June 9, the central bank should set the course for this by announcing an end to its bond purchases. Because this is a prerequisite for a first interest rate hike.
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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”. Bundesbank chief Joachim Nagel and other currency watchdogs have envisaged a turnaround in interest rates for July. Dutch central bank governor Klaas Knot even raised the possibility of a half a percentage point hike if inflation were even more broadly based or accelerating in the coming months.
Different positions over further course
The interest rate on deposits in the euro area, which is decisive for monetary policy, is currently minus 0.5 percent. This means that banks that hold excess liquidity at the ECB have to pay negative interest for it. However, the minutes also show that there are very different positions in the Council on the further course of monetary policy.
The proponents of a tighter monetary policy called for a faster normalization of monetary policy, otherwise there is a risk that inflation expectations in the euro area could continue to rise above two percent. This in turn could then lead to second-round effects, i.e. to further price increases as a reaction to previous cost increases. The central banks normally want to prevent such momentum.
The advocates of a looser monetary policy, dubbed “doves”, pointed out, however, that even small increases in interest rates would relatively quickly reach the level at which monetary policy tends to slow down the economy.
One of the representatives of the deaf camp is ECB Executive Board member Fabio Panetta. After the April meeting, he indirectly spoke out against a rate hike in July. In his view, it is unwise to act on interest rates before the second quarter economic data is known.
Panetta believes that growth in the euro zone has effectively come to a standstill. This complicates the ECB’s decisions to contain inflation. In an interview, he said monetary tightening “would hamper already flagging growth”.
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The influential ECB chief economist Philip Lane is also considered a dove. He has a key role on the board. As Chief Economist, he gives a lecture on the economic situation at Council meetings and makes a proposal for monetary policy decisions, which the Council usually follows. In addition, the departments for which he is responsible play a key role in preparing the council meetings.
According to a report by the Reuters agency, however, there should now be changes in the procedures for council meetings. Accordingly, the regular presentation by chief economist Lane in the meetings should be shorter. There should be more discussion about that.
Observers see the change as strengthening the weight of the national central bank governors. On the other hand, the prominent role of the chief economist would be somewhat restricted.
Lagarde had declared when she took office in 2019 that she wanted to bring about a stronger consensus in the Governing Council. At the time, the Governing Council was deeply divided. Your predecessor Mario Draghi was known for often preparing important decisions in small groups. Critics accused him of often confronting the ECB council members with a fait accompli when making important decisions.
More: Doves or hawks: The Governing Council of the ECB is divided along these lines