President of the European Central Bank Christine Lagarde at a press conference in Nicosia during a visit to Cyprus on March 30, 2022 (AFP / Iakos Hatzistavrou)
The president of the European Central Bank (ECB) on Wednesday laid the groundwork for raising interest rates in July to overcome rapid inflation, which would mark the beginning of the end of “easy money” in the eurozone after the United States.
The European Monetary Authority will “first finish” its net asset purchases “at the beginning of the third quarter”, ie in July, then the first rate hike should take place “a little later”, “in just a few weeks”. “Ms. Lagarde warned in a speech in Ljubljana.
While inflation in the eurozone in April reached a record 7.5% for the year, the ECB seems determined to return the unit to the 2% target for the next two years.
His choice is Cornelian. If rates are not raised, this could lead to a slight increase in inflation, in particular due to higher wages after high inflation. Growing them too fast can slow down the already weak growth.
Again in April, the ECB said it wanted to wait. But the shock in prices, including energy tariffs, caused by Russia’s war against Ukraine and its multiple deficits prevents it from being idle.
– Travel in stages –
The next meetings of the European Central Bank on June 9 in Amsterdam, and then on July 21 in Frankfurt, also promise to be a turning point before the summer break.
“After the first rate hike, the normalization process will be gradual,” Lagarde said. Since April, she has been talking about a “phased trip”, heralding a series of tariff increases after the beginning of summer.
Evolution of the European Central Bank’s refinancing and deposit rates since 2008 (AFP /)
This change is mainly driven by the hawks, who are in favor of tighter monetary policy in the Governing Council, the ECB’s decision-making body.
The latter seem to have taken over the “pigeons”, followers of long-term support for the economy.
“As long as inflation in the eurozone remains high, we must act now,” said Joachim Nagel, president of the German Bundesbank, on Tuesday.
According to this “hawk”, a monetary shift is possible now, but it will be more difficult if we have to wait for the end of the war in Ukraine.
“It is time to end the measures taken to combat low inflation,” added Isabel Schnabel, a member of the ECB’s executive board, in a speech in Vienna on Wednesday.
This means that the era of net repayment of public and private debt should end, as well as negative rates, by taxing today at -0.5% of bank deposits that do not operate in the ECB, instead of being distributed on credit.
A policy that has been regularly criticized in the first European economy, where many Germans accuse the ECB of fueling rising prices and impoverishing savers.
In a few months, “money will be a little difficult,” and “interest rates will rise, but very gradually,” Francois Villeroy de Gallo, governor of the Banque de France, told France Inter on Wednesday.
– The first increase since 2011 –
US Central Bank President Jerome Powell in Washington May 4, 2022 (AFP / Jim WATSON)
The ECB has not seen a rate hike since 2011, but is now clearly preparing to follow in the footsteps of other major central banks that are ahead of the issue.
In early May, the US Federal Reserve raised key rates by 0.5 points to fight inflation, which was even higher than in the euro area. And the Bank of England (BoE) has raised its rate to its highest level since 2009.
As for the eurozone, Axa’s chief economist Gilles Moek, in an interview with AFP, expects “the first rate hike in July and then a return to zero (negative rate) in September, before a long break.”
However, he does not expect a long series of increases.
“Due to the continuation of the war in Ukraine, the difficult situation with the coronavirus in China and the side effects of the rapid strengthening of financial conditions in the United States, the ECB will not be able to easily continue normalization after 2022,” he said.