ECB plans end to negative rates era as inflation soars

Negative interest fees will soon be an issue of the past within the eurozone, the ECB’s leader signaled Monday, with the bank poised to elevate costs for the primary time in over a decade to tamp down soaring inflation.

The Frankfurt-based group became “possibly to be in a function to exit negative interest prices by means of the end of the third sector”, ECB President Christine Lagarde wrote in a weblog put up.

The clear time frame for rate rises came as the ECB plays catch up with other central banks in responding to surging inflation.

Lagarde had previously argued that sharp leaps in consumer prices, driven in part by the waning effect of the Covid-19 pandemic, were likely to subside in a few months.

But Russia’s war in Ukraine has thrown a new spanner in the works, worsening already disrupted supply chains and throwing up new shortages in essential materials from wheat to metals.

Energy prices were also on the march, as Western economies including Germany — the eurozone’s biggest — scramble to wean themselves off Russian power.

Consumer prices soared at a rate of 7.5 percent in the eurozone in April, an all-time high for the currency club and well above the bank’s two-percent target.

The renewed surge has already prompted a sharp response from many central banks.

The US Federal Reserve raised rates by an unusually large 50 basis points at the beginning of May, while the Bank of England sealed its fourth consecutive hike.

The euro climbed one percent against the dollar following Lagarde’s comments, having struggled as the Fed acted more aggressively to fight inflation.

The end of the ECB’s bond-buying stimulus program “very early in the third quarter” would pave the way for a “rate lift-off at our meeting in July”, Lagarde said.

The initial hike would lift rates from their current historically low levels.

These include a minus 0.5 deposit rate which effectively charges banks to park their excess cash at the ECB overnight.

Any hikes beyond zero would be dependent on the “inflation outlook”, Lagarde said.

If the forecasted rate of inflation appeared to be stabilizing around the ECB’s two-percent target, further increases “will be appropriate”.

Policymakers will be keeping an especially close eye on the development of wages for fear pay increases could stoke inflation further.

Wage rises in the first quarter of 2022 had been “moderate”, the German central bank said in a report also published Monday.

But the Bundesbank warned that the ballooning cost of living could lead to “stronger rises” in Europe’s largest economy in the near future.

Following Lagarde’s comments, Commerzbank senior economist, Michael Schubert, said he expected the ECB “to raise the deposit rate by 25 basis points at each of its seven meetings between July and April” next year.

The hiking streak could convey the important thing rate to at least 1.25 percent, he stated but warned the ECB might also need to head in addition in order to convey inflation beneath manipulation.

ECB policymakers subsequently meet to decide their path of motion on June nine and July 21, with the July date seen as the maximum in all likelihood for the first hike.