Cyber Monday Deal: Up to 60% off InvestingProCLAIM SALE

Lagarde gains key allies for rate hike plans

Published 05/25/2022, 06:14 AM
Updated 05/25/2022, 07:46 AM
© Reuters. FILE PHOTO: European Central Bank (ECB) board member Klaas Knot appears at a Dutch parliamentary hearing in The Hague, Netherlands September 23, 2019 REUTERS/Eva Plevier

DAVOS/FRANKFURT (Reuters) - European Central Bank President Christine Lagarde gained key allies for her plan to raise rates out of negative territory this summer, even as one of her own board members on Wednesday expressed some scepticism about the policy path ahead.

With inflation broadening, Lagarde said this week that the ECB's minus 0.5% deposit rate should start rising in July and could be at zero or "slightly above" by the end of September before rising further "towards the neutral rate".

Dutch central bank chief Klaas Knot, among the most conservative members of the ECB's Governing Council said he fully backed this plan and Olli Rehn, Finland's central bank chief, also voiced support for rate hikes in the summer, as did the ECB's own chief economist Philip Lane.

"I'm fully on board, I fully support everything that is in the (Lagarde) blog, I think it nicely charts the policy course," Knot told a World Economic Forum panel in Davos.

Knot earlier said that a 50 basis point rate hike in July should remain a possibility but his comments on Wednesday suggest support for smaller, 25 basis point moves, in line with Lagarde's call for gradualism.

Speaking in Helsinki, Rehn, considered by some to be a policy "dove" who favours lower rates, said he also supported 25 point rate hikes in both July and September.

Lane said the rate hike path sketched by Lagarde for the summer was "clear and robust" but he cautioned that any move beyond September will depend on how inflation pans out and the impacts of the war in Ukraine.

Earlier this week, the central bank governors of Austria and Latvia both said that a 50 basis point rate hike should be an option in July, indicating that a 25 basis point increase is not yet a done deal.

Fabio Panetta, an outspoken dove, took a somewhat different view, arguing that policy normalisation should not be equated with getting interest rates back to a neutral setting. Instead, he said the aim should be to cement the inflation at the ECB's 2% target.

"Normal does not mean neutral... the normalisation process should not be assessed against unobservable reference points, such as the natural or neutral rate of interest," Panetta said in a speech in Frankfurt.

Others, including French central bank chief Francois Villeroy de Galhau, an influential centrist voice, have also argued that the neutral rate is a key reference point in policy normalisation.

© Reuters. FILE PHOTO: President of the European Central Bank Christine Lagarde takes part at the panel discussion at the World Economic Forum 2022 (WEF) in the Alpine resort of Davos, Switzerland May 25, 2022. REUTERS/Arnd Wiegmann/File Photo

The nominal neutral rate is estimated to be between 1% and 2%, or 150 to 250 basis points above the current minus 0.5% deposit rate, suggesting that the ECB could raise rates well into next year before approaching this level.

Backing up his argument for caution, Panetta also said that the growth outlook is clearly weakening, a view Rehn appeared so share when he said the ECB was likely to cut its growth projection next month.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.