She thus emphasized her fundamental change in her attitude to monetary policy. Originally, it ruled out an increase in interest rates this year, but now it plans to increase interest rates several times. The reason is record inflation in the euro area.
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“Under the current outlook, we are likely to be able to abandon negative interest rates by the end of the third quarter,” Lagarde said in an ECB blog post. The first increase in interest rates in the eurozone could take place in July.
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The basic interest rate in the euro area is at zero, the deposit rate at minus 0.5 percent. This means that commercial banks pay to deposit money with the ECB. The deposit rate has been below zero since 2014, when the ECB struggled with too low inflation.
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Record inflation
However, prices have risen sharply in recent months. Inflation in the eurozone rose to a record 7.4 percent in April. The ECB exceeded the 2% target without including volatile food and energy prices.
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Lagarde’s comment, according to Bloomberg, suggests that the ECB could raise interest rates by a quarter of a percentage point in July and September. Dutch central bank chief Klaas Knot last week mentioned the possibility of raising rates by half a percentage point if necessary.
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However, Lagarde said it was prudent to move slowly up rates and monitor the effects on the economy and the inflation outlook.
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An unusual step
“Lagarde has taken an unusual step, essentially announcing one interest rate increase in July and another in September. This has removed most of the doubts about the ECB’s next steps, and a half-percentage point increase in July is unlikely, “said Bloomberg Economics chief economist for the eurozone, David Powell.
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The Russian invasion of Ukraine sent up commodity prices and increased uncertainty about the outlook. It has also worsened the confidence of businesses and households. This has created a difficult situation for bankers, as many measures to slow inflation can also slow down economic activity even more.
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However, by raising interest rates by half a percentage point by September, the ECB will continue to lag behind other major central banks in the world, such as the US (Fed) or the UK. This has also contributed to the weakening of the euro in recent months, further complicating the ECB’s work as it makes imports more expensive, one of today’s inflation engines.
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