FRANKFURT: Negative interest rates will soon be a thing of the past in the eurozone, the ECB’s chief signalled Monday, with the bank poised to raise rates for the first time in over a decade to tamp down soaring inflation.
The Frankfurt-based institution was “likely to be in a position to exit negative interest rates by the end of the third quarter”, ECB President Christine Lagarde wrote in a blog post.
The clear time frame for rate rises came as the ECB plays catch up with other central banks in responding to surging inflation.
Lagarde had previously argued that sharp leaps in consumer prices, driven in part by the waning effect of Covid-19 pandemic, were likely to subside in a few months.
But Russia’s war in Ukraine has thrown a new spanner in the works, worsening already disrupted supply chains and throwing up new shortages in essential material from wheat to metals.
Energy prices were also on the march, as Western economies including Germany – the eurozone’s biggest – scramble to wean themselves off Russian power.
Consumer prices soared at a rate of 7.5 percent in the eurozone in April, an all-time high for the currency club and well above the bank’s two-percent target.
The renewed surge has already prompted a sharp response from many central banks.
The US Federal Reserve raised rates by an unusually large 50 basis points at the beginning of May, while the Bank of England sealed its fourth consecutive hike.
The euro climbed one percent against the dollar following Lagarde’s comments, having struggled as the Fed acted more aggressively to fight inflation.
The end of the ECB’s bond-buying stimulus programme “very early in the third quarter” would pave the way for a “rate lift-off at our meeting in July”, Lagarde said.
The initial hike would lift rates from their current historically low levels.
These include a minus 0.5 deposit rate which effectively charges banks to park their excess cash at the ECB overnight.
Any hikes beyond zero would be dependent on the “inflation outlook”, Lagarde said.
If the forecasted rate of inflation appeared to be stabilising around the ECB’s two-percent target, further increases “will be appropriate”.
Policymakers will be keeping an especially close eye on the development of wages for fear pay increases could stoke inflation further.
Wage rises in the first quarter of 2022 had been “moderate”, the German central bank said in a report also published Monday.
But the Bundesbank warned that the ballooning cost of living could lead to “stronger rises” in Europe’s largest economy in the near future.
Following Lagarde’s comments, Commerzbank senior economist, Michael Schubert, said he expected the ECB “to raise the deposit rate by 25 basis points at each of its seven meetings between July and April” next year.
The hiking streak would bring the key rate to 1.25 percent, he said, but warned the ECB may need to go further in order to bring inflation under control.
ECB policymakers next meet to decide their course of action on June 9 and July 21, with the July date seen as the most likely for the first hike.