Change of course in the summer: ECB boss announces a possible turnaround in interest rates

Change of course in summer
ECB boss announces a possible turnaround in interest rates

The European Central Bank has maintained its zero interest rate policy for more than six years. In view of the rising inflation in the euro area, however, ECB boss Lagarde is now indicating that the key interest rate will soon be increased for the summer. However, there is no specific date yet.

ECB President Christine Lagarde is preparing the financial markets for the scenario of an interest rate turnaround in July. Bond purchases are likely to be phased out early in the third quarter, followed by a rate hike that could possibly come “some time later,” the Frenchwoman said at a conference in Slovenia. The ECB lowered interest rates to zero in March 2016. Recently, the voices from the management level of the European Central Bank have increased, urging an early end to the ultra-loose monetary policy.

“We haven’t yet defined exactly what ‘some time after’ means,” said Lagarde. “But I said very clearly that this could be a period of just a few weeks.” The Governing Council of the ECB will next discuss future monetary policy on June 9, with the subsequent meeting taking place on July 21. After that, the Governing Council of the ECB will not meet again for a regular monetary policy meeting until September.

In view of the record inflation in the euro area, the head of the Bundesbank, Joachim Nagel, is also urging action. It is important to act quickly to avoid second-round effects such as prices and wages escalating and inflation expectations getting out of hand. The deposit rate in the euro area is currently minus 0.5 percent. This means that banks have to pay penalty interest if they park excess funds with the central bank. The key interest rate is currently 0.0 percent.

The pressure on the ECB to raise interest rates has recently increased due to the high inflation rate in the euro area. It reached a record high of 7.5 percent in April. In other countries such as the USA and Great Britain, the central banks have already increased interest rates this year.

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