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ECB firms up expectations for July interest rate hike

Economy May 11, 2022 09:21AM ET
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© Reuters. FILE PHOTO: President of European Central Bank Christine Lagarde addresses a news conference following the meeting of the Governing Council's monetary in Frankfurt, Germany March 10, 2022. Daniel Roland/Pool via REUTERS

LJUBLJANA (Reuters) -The European Central Bank has firmed up expectations that it will raise its benchmark interest rate in July for the first time in more than a decade to fight record-high inflation, with some policymakers even hinting on Wednesday at further hikes after the first.

With ECB policymakers clamouring for a rate hike for weeks, President Christine Lagarde has finally thrown her weight behind such a move, saying the central bank was likely to end its stimulus programme early in the third quarter, followed by a rate hike that could come just "a few weeks" later.

Most other major central banks have already raised borrowing costs but the ECB, which had fought too low inflation for a decade, is still pumping cash into the financial system via bond purchases.

"My expectation is that they should be concluded early in the third quarter," Lagarde said at a conference in the Slovenian capital.

"The first rate hike, informed by the ECB’s forward guidance on the interest rates, will take place some time after the end of net asset purchases...(and) this could mean a period of only a few weeks."

Inflation hit 7.5% in the euro zone last month and even measures that strip out food and energy prices rose above the ECB's 2% target.

"What started as a one-off shock has now become a more broad-based phenomenon," ECB policymaker Bostjan Vasle said at the same event. "When the circumstances change, the policy response must follow," the Slovenian governor added.

ECB board member Isabel Schnabel said the ECB needed to act now to protect its credibility and stop inflation expectations, which have risen to 2% or slightly above, from spiralling out of control.

GROWING CALLS

The number of ECB policymakers calling for a July hike has been growing almost every day and on Wednesday alone included board member Frank Elderson, French central bank governor Francois Villeroy de Galhau and Bundesbank president Joachim Nagel.

"I think that from this summer onwards, the ECB will gradually raise its interest rates," Villeroy de Galhau told France Inter radio.

Estonian governor Madis Mueller also hinted at a series of hikes that could lift the ECB rate on bank deposits, which is currently -0.5%, above zero by the end of the year for what would be the first time since 2014.

"Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year," he told Reuters in an interview.

ECB firms up expectations for July interest rate hike
 

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Comments (2)
Gamer Turtle
GamerTurtle May 11, 2022 9:31AM ET
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Inflation in 2021 were mostly driven by Covid and was expected to normalize once supply chain catch up. now inflation is mainly driven by the war in Ukraine. The whole energy and food price gouging is due to sanction that were imposed for political need while not inflicting any dmg to Russia. EU was heavily invested in renewable and slowly getting off traditional energy anyway. the whole sanction just shifts supply and demand to elsewhere, EU buys from US, China stops buying from US and buy from Russia. Same destination, different path, but everyone made more money through higher margin while ppl suffers. The better solution should have been stay still and speed up renewable programs, Ukraine wasn't even a member of NATO anyway. when was the last time EU sanctions the US for illegal invasion? lack of sovereignty is what's slowly making EU irrelevant.
Chris Johnson
Chris Johnson May 11, 2022 5:03AM ET
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"we may get to a positive rate"... It shows how ridiculous the whole financial world has become
Gamer Turtle
GamerTurtle May 11, 2022 5:03AM ET
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cuz they're all politicians, not financial experts. lol
 
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