Forex in this article
Despite record inflation, European currency holders are still leaving consumers and savers in the dark about the timing of an initial interest rate hike. By contrast, there are now clearer signs of an end to ultra-loose monetary policy this summer. The European Central Bank (ECB) has started to normalize its monetary policy, said ECB President Christine Lagarde, who attended the press conference after Thursday’s online Governing Council meeting due to a corona infection. “The journey has begun”. Critics accused the central bank of lacking resolve and risky waiting.
The ECB has pledged to only raise interest rates when it runs out of fresh money in bonds. The ECB left it open when interest rates rose. economists believe that a first rate hike this year is possible.
For now, the key interest rate remains at a record low of zero percent. However, new data reinforced the Board of Governors’ expectation that net purchases of government and corporate bonds under the APP purchase program should be halted in the third quarter. At the June meeting, the Governing Council of the ECB will decide on the end of the purchase program and the future path of interest rates, Lagarde said. The new economic and inflation forecasts will also be available at that time.
According to Commerzbank chief economist Jrg Krmer, waiting for the central bank is risky. “The longer the ECB sticks to its very accommodative monetary policy, the more people’s inflation expectations rise and very high inflation becomes permanent.”
Banking association BdB welcomed the prospect of an end to the multibillion-dollar bond-buying program in the third quarter. “However, this is not enough. The end of negative interest rates must come this year,” said BdB chief executive Christian Ossig.
The German Association of Savings and Transfer Banks (DSGV) accused the central bank of lacking determination. “Inflation in the euro zone is reaching unprecedented heights, and the ECB must put an end to it,” warned DSGV chairman Helmut Schleweis. “The current high inflation rates should not be allowed to solidify permanently.”
The war in Ukraine is weighing on the eurozone economy and further pushing up energy prices, which were already the main drivers of inflation. In March, the ECB, whose main objective is price stability with an inflation rate of 2%, assumed weaker economic growth and significantly higher inflation for the current year than had been scheduled for December.
“The war in Ukraine is hitting the economy hard and has dramatically increased insecurity,” Lagarde said. Inflationary pressures have increased and inflation will remain high in the coming months.
In the euro zone, the inflation rate reached 7.5% in March, the highest level since the introduction of the euro as the currency of settlement in 1999. “Inflation data speaks plain language . Monetary policy should not miss the opportunity to take timely countermeasures,” Bundesbank President Joachim Nagel recently warned.
For the central bank, however, this is a balancing act: if it raises interest rates too quickly or too much, there is a risk of the economy stalling. If monetary authorities react too late, interest rates may have to rise faster or higher. A sharp rise in interest rates could also weigh on economic development.
ECB chief Fabio Panetta recently warned that excessive central bank intervention to tackle rising inflation would stifle economic growth in the euro zone. Moreover, such monetary tightening would not have a direct impact on the increase in energy and food prices, due to global factors and now the war in Ukraine.
The policy interest rate in the 19-nation currency area has been at an all-time high of zero percent for about six years now. Banks that deposit funds with the ECB have had to pay interest on them since June 2014. This deposit rate is currently minus 0.5%. Deductions for certain sums are intended to relieve the institutes of the costs incurred. Under the APP program, in effect since 2015, the ECB has already invested more than three trillion euros in government bonds and corporate securities, supporting the economy.
The particularly flexible PEPP bond purchase program launched during the corona pandemic expired at the end of March. Since then, the central bank has not purchased any new securities under this program. Funds from expiring PEPP papers will continue to be reinvested at least until the end of 2024./mar/DP/jsl
Editing finanzen.net / (dpa-AFX)
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