Inflation in the euro area is rising and rising. The ECB has still not set a specific date for an interest rate hike. It could be exciting in June.
Despite record inflation, Europe’s currency watchdogs are still leaving consumers and savers in the dark about the timing of the first interest rate hike. By contrast, there are now clearer signs of an end to the ultra-loose monetary policy in the summer.
The European Central Bank (ECB) has started to normalize its monetary policy, said ECB President Christine Lagarde, who attended the press conference after Thursday’s Governing Council meeting online because of a corona infection. “The journey has begun”. Critics accused the central bank of a lack of determination and risky waiting.
The ECB has decided not to raise interest rates until it runs out of fresh money in bonds. The ECB left open when interest rates will rise again. Economists believe that a first rate hike this year is possible.
The key interest rate remains at a record low of zero percent
For the time being, the key interest rate remains at the record low of zero percent. However, new data strengthened the Governing Council’s expectation that the net purchases of government and corporate bonds as part of the APP purchase program should be discontinued in the third quarter. At the June meeting, the Governing Council will decide on the end of the purchase program and the future interest rate path, said Lagarde. The new economic and inflation forecasts will also be available at this time.
According to Commerzbank chief economist Jörg Krämer, waiting for the central bank is risky. “The longer the ECB sticks to its very loose monetary policy, the more people’s inflation expectations rise and the very high inflation becomes permanent.”
The banking association BdB welcomed the prospect of an end to the multi-billion dollar bond purchase program in the third quarter. “But that’s not enough. The end of negative interest must come this year,” said BdB general manager Christian Ossig.
The German Savings Banks and Giro Association (DSGV) accused the central bank of a lack of determination. “Inflation in the euro area is climbing to unprecedented heights, and the ECB must put a stop to that,” warned DSGV President Helmut Schleweis. “The current, high inflation rates must not be allowed to solidify permanently”.
Stable prices are the top priority
The war in Ukraine is weighing on the economy in the euro area and is further heating up energy prices, which were already the main drivers of inflation. In March, the ECB, whose primary goal is stable prices with an inflation rate of two percent, assumed weaker economic growth and significantly higher inflation in the current year than had been forecast in December.
“The war in Ukraine is hitting the economy hard and has significantly increased uncertainty,” Lagarde said. Inflationary pressures have increased and inflation will remain high in the coming months.
In the euro area, the inflation rate reached 7.5 percent in March, the highest level since the euro was introduced as a settlement currency in 1999. “The inflation data speak a clear language. Monetary policy must not miss the opportunity to take countermeasures in good time,” warned Bundesbank President Joachim Nagel recently.
For the central bank, however, it is a balancing act: if it increases interest rates too quickly or too much, there is a risk that the economy will stall. If the monetary authorities react too late, interest rates might have to rise faster or higher. An abrupt rise in interest rates could also have a negative impact on economic development.
ECB Director Fabio Panetta recently warned that excessive intervention by the central bank to combat rising inflation would choke off economic growth in the euro area. Such monetary tightening would also not have a direct impact on rising energy and food prices, driven by global factors and now the Ukraine war.
Zero for years
The key interest rate in the currency area of the 19 countries has been at a record low of zero percent for around six years now. Banks that park funds at the ECB have had to pay interest on them since June 2014. This deposit rate is currently minus 0.5 percent. Allowances for certain sums are intended to relieve the institutes of the costs involved. As part of the APP program, which has been in use since 2015, the ECB has already invested more than three trillion euros in government bonds and corporate securities, which is supporting the economy.
The particularly flexible PEPP bond purchase program launched during the corona pandemic expired at the end of March. Since then, the central bank has not purchased any new securities under this program. Funds from expiring PEPPs will continue to be reinvested until at least the end of 2024.
Source: Stern
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
