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ECB Likely To Get Out Of Negative Rates By September

27 June 22

In a blog post published on the ECB’s website, Lagarde stated that “based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.” Additionally, it may be raised further if inflation stabilizes at 2%.

She was speeding up an already dramatic policy shift, which saw her go from almost ruling out rate rises this year to now making changes in the face of high inflation in the eurozone.

“If we see inflation stabilizing at 2% over the medium term, a progressive further normalization of interest rates towards the neutral rate will be appropriate.” – Lagarde

The ECB’s deposit rate is at -0.5%, which means banks are being charged to store cash with the central bank. This has been below zero since 2014 as the central bank battled excessively low inflation.

However, prices have increased in recent months as the cost of petroleum has risen as a result of the war in Ukraine. This, as a result, has affected other products as well.

In April, headline inflation in the eurozone reached an all-time high of 7.4%. Even measures that exclude food and energy were well above the ECB’s 2% objective.

Lagarde unlocked more rate rises in the direction of what economists refer to as the “neutral rate.” The term is also known as an unobservable rate that puts economic production in line with – or even above – its potential.

“If the euro area economy were overheating as a result of a positive demand shock, it would make sense for policy rates to be raised sequentially above the neutral rate.” – Lagarde 

She emphasized, however, that the timing and magnitude of such rate hikes could not be predicted from the very beginning. Mainly, this is due to the given economy’s supply shocks, such as China’s pandemic-related limitations and interruptions caused by the war in Ukraine. 

“This creates more uncertainty about the speed with which the current price pressures will abate, about the evolution of excess capacity, and about the extent to which inflation expectations will continue to remain anchored at our target,” Lagarde said.

Last week, Lagarde attended a meeting of financial policymakers from the Group of Seven industrialized nations. There, central bankers and finance ministers were urged by experts to tackle inflation before it became unanchored.

The ECB will also be empowered to “design and deploy new instruments,” according to Lagarde, to ensure that monetary policy is adequately conveyed throughout the euro region.

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