To know the final decision by the monetary institution about rate hikes in euro zone, it was not necessary to wait for the Governing Council (ECB). Christine Lagarde, its president, stated this morning that the entity’s next July meeting is the best time to initiate the first increase in interest rates within the euro area in over a decade. “I expect net purchases under the APP program to end very soon in the third quarter. In line with our future orientation, this would allow us raise the rate at our July meeting,” said the Frenchwoman in an article posted on the ECB Blog.
Lagarde’s words are surprising because of the way she announced the ECB’s foreseeable decision via the internet. This was even after trying to silence a part of her Council about when they would raise rates in the Euro zone.
He actually provided more details about the year’s end. According to the institution’s president, it seems likely that the entity will be able “to get out negative interest rates before the end of third quarter.” According to her, the sharply rising inflation outlook calls for no nominal variables to be tightened, which includes interest rates.
He argues that this would not be a tightening monetary policy. Instead, he suggests that leaving policy rates unchanged would be a relaxation of policy.
Lagarde emphasizes that the evolution of medium-term inflation outlook should guide the next stage in normalization of ECB’s monetary policies. “If inflation stabilizes at 2% in the medium term, then further progressive normalization towards the neutral rate would be appropriate,” warned Lagarde. However, it is impossible to predict the pace and extent of adjustment ex ante.
Since the beginning of the war in Ukraine, inflation in the euro area has been on the rise for several months. The year-on-year inflation rate was 7.4% in April. Countries like Spain were above 8%.
Mortgages will rise if interest rates increase even half a percentage in the remaining year. They will average between 170 to 350 euros per year.
Lagarde warned, however, that the current situation is complicated by negative supply shocks. These create uncertainty about how fast price pressures will decrease, the evolution of excess capacity, and the extent to which inflation expectations will be anchored to our target.
He says that in such a situation, there are arguments for gradualism, flexibility, and optionality when it comes to adjusting monetary policies.
Lagarde reminds us that, if necessary to transmit monetary policy towards normalization, the ECB can create and deploy new instruments.
