According to the president of the European Central Bank (ECB), the eurozone should end negative interest rates at the end of the third quarter of this year. In a blog post by the monetary authority, Christine Lagarde explains that rising prices justify this schedule of monetary policy changes.
“I hope the net purchase of debt under the APP [asset-purchase program] end at the beginning of the third trimester. This would allow us to raise interest rates at our July meeting in line with our “forward-looking leadership,” Christine Lagarde wrote in a publication on the normalization of monetary policy in the eurozone. phase out negative interest rates by the end of the third quarter.”
ECB interest rates are currently at historical lows, with the main refinancing rate of 0% and the interest rate applicable to the margin facility at 0.25%. The deposit rate is even negative: at the level of -0.50%.
With Monday’s statements, Lagarde refers to the latter, which means in practice that banks have to pay for the money they parked at the supervisory authority. Thus, to stop being negative, the rate could be raised twice (the first time in July and the second time before the end of September) by 25 basis points each.
In response to Lagarde’s words, the eurozone government debt yield continued to rise. German 10-year bonds rose 2 basis points to 0.957%, while Portuguese bonds with the same maturity rose 1.9 points to 2.136%. The interest rate on Spanish debt is trading at 2.093% and on Italian debt at 2.995%.
The pace and extent of normalization will depend on inflation
The reason for the change is related to price dynamics. “Given that the inflation outlook has changed significantly compared to the pre-pandemic period, it is appropriate to adjust the adjustable variables, including interest rates,” Lagarde said. “This is not a tightening of monetary policy, but keeping rates unchanged in these conditions would represent a policy easing that is not needed now.”
Year-on-year inflation in the euro area accelerated by 7.4% in April after 7.5% recorded in March. In the European Union, it hit a new all-time high of 8.1% last month. The surge, exacerbated by the region’s energy crisis as well as supply chain constraints in the face of a post-pandemic economic recovery, has led analysts and investors to expect the ECB to speed up the end of its debt purchases and raise interest rates.
after graduation Pandemic Emergency Assistance Program (PEPP) in March regular asset purchase program (APP). At the latest ECB monetary policy meeting, Lagarde had already announced the latter’s fall was accelerating, with net purchases of €30bn a month in May and €20bn in June. Ensure now that you won’t have to hold on after letting interest rates rise.
“The next stage of normalization will have to be determined by the evolution of inflation surprises over the medium term. If we see inflation stabilizing at 2% over the medium term, there will be a progressive normalization of interest rates towards neutral rates. appropriate. But the pace and size of the adjustments cannot be determined ‘in advance’,” Lagarde added.
(News updated at 10:05)
