The ECB is aiming for a value of 2.0 percent as the optimal level for the economy in the euro area.
(Photo: dpa)
Frankfurt The expectation that the European Central Bank (ECB) will raise interest rates for the first time as early as July is gradually gaining ground. The official key interest rate is currently zero, the more important interest rate for commercial bank deposits at the ECB is minus 0.5 percent.
Such an early move would leave room for even more rate hikes this year. It is relatively clear that the central bank will stop buying bonds in the summer, so that only expiring securities will be replaced and the balance sheet total will remain stable. According to repeated statements by the ECB, this stop is a prerequisite for interest rate hikes.
In addition to the high inflation of 7.5 percent in March in the euro area, some statements by members of the ECB Council speak for a foreseeable interest rate hike. Central bank deputy Luis de Guindos said in an interview that July was “live”, which can be seen as a clear signal without further explanation. And the head of the Bundesbank, Joachim Nagel, recently said that the first interest rate hike could be expected in early July. The head of the Latvian central bank, Martins Kazaks, believes that up to three rate hikes are possible in the current year.
Greg Fuzesi, ECB expert at US bank JP Morgan, therefore expects a rate hike of 0.25 percentage points “more likely in July than in September”. This roughly corresponds to today’s market expectations, as confirmed by Pilar Gomez Bravo, bond expert at the US fund company MfS. According to Fuzesi, there should be more such steps in September and December and then four more in the coming year. The interest rate on deposits would then be 1.25 percent.
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Because that is still below the neutral rate of around two percent, further steps are then due in 2024, Fuzesi writes in a study. An interest rate that neither slows down nor accelerates the economy is considered “neutral”, although this percentage can only ever be estimated. According to JP Morgan’s logic, the ECB’s policy would no longer have an expansive effect until 2024.
Probability of recession in the USA lower than in Europe
Jari Stehn, European economist at the US bank Goldman Sachs, expects bond purchases to stop at the end of June and then the same sequence of interest rate hikes as Fuzesi, up to 1.25 percent in the coming year. A significant economic slowdown could result in a slower succession. If there are second-round effects, i.e. wage increases, which in turn drive up prices, then a faster sequence is also possible.
Like the Fed in the USA, the ECB is under pressure to act. Second-round effects play a much larger role in America than in Europe. Also, the US is less affected by the war in Ukraine. An economic downturn or recession is therefore less likely there than in Germany. But there are also fears in the USA that tightening monetary policy too quickly could slow down the recovery after the pandemic.
In Europe, politicians and economists are debating whether Germany and other EU countries should stop buying oil and gas from Russia. There are several studies on the issue, all of which predict a recession when this happens. Should this scenario occur, the decisions for the ECB would be even more difficult.
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