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Europe is Getting Ready to Raise Interest Rates

In: Finance, Forex

Addressing reporters following the ECB’s policy announcement, Lagarde signaled the next meeting, in Amsterdam in June, will start the clock ticking toward rate hikes. Policy makers will have to incorporate an “element of judgment” as they assess fresh economic forecasts amid heightened uncertainty caused by the war in Ukraine, she said.

The first hike in borrowing costs in more than a decade is expected to be by 25 basis points. European Central Bank policy makers are forming a consensus around increasing interest rates in the third quarter of 2022 to tackle record inflation.

Several policy makers called for an earlier end to bond buying, the officials said. Ultimately though, the Governing Council agreed unanimously on Thursday’s statement, they said.

President Christine Lagarde said on Thursday, the ECB reiterated a plan to end asset purchases next quarter, though it declined to specify a precise end-date. Exiting bond-buying is a pre-condition for raising rates, which could follow anywhere between a week to several months after.

Facing inflation that’s almost four times their 2% target alongside threats to the euro zone’s pandemic rebound, officials are cautiously winding down stimulus. Markets are betting they’ll raise rates twice this year — by a quarter-point each in September and December to bring the deposit rate to zero.

Lagarde said by video link: “Our forward guidance will be determining and helping us determine at the June projection meeting if we decide to terminate net asset purchases, what exactly will be the policy going forward in terms of rates.”

The current wording in the ECB’s guidance is inclusive and would allow the central bank to refrain from conducting any net asset purchases in the third quarter, according to one of the officials.

Extract From the ECB’s April 14 Policy Statement:

“Monthly net purchases under the APP will amount to 40 billion euros in April, 30 billion euros in May and 20 billion euros in June. At today’s meeting the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under the APP should be concluded in the third quarter. The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook”

Former ECB Chief Economist Peter Praet said: “The normalization of rates is something also most of the Governing Council members want to do, is going back to zero, and that probably before the end of the year, what comes after is more controversial. But going back to zero is probably something that is really in the cards.”

Investors recently have been focused on what would happen if the war in Ukraine leads to a ban on imports of oil and natural gas from Russia. Germany, Europe’s biggest economy, was warned this week it could face a 220 billion-euro ($240 billion) hit to output over the next two years in the event of a sudden embargo.

“Upside risks surrounding the inflation outlook have also intensified, especially in the near-term,” Lagarde said. “We are very attentive to the current uncertainties and are closely monitoring the incoming data.” While the ECB is still well behind the Federal Reserve and the Bank of England in raising borrowing costs, the faster timetable for withdrawing stimulus that it unveiled in March underlines an increasing focus on taming price pressures.

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