Lagarde hints ECB rate hike could come as soon as July

Frankfurt is expected to start sequence of rate increases to stop high inflation becoming entrenched

 

The European Central Bank is likely to end its bond-buying stimulus programme early in the third quarter of this year, followed by a rate hike that could come just “a few weeks” later, ECB president Christine Lagarde said on Wednesday.

Ms Lagarde was cementing market expectations that the ECB will raise its policy rate for the first time in over a decade in July in a bid to tame record-high euro zone inflation - the result of surging energy prices spilling over to other goods.

Most other major central banks have already raised borrowing costs but the ECB, which had fought too low inflation for a decade, is still pumping cash into the financial system via bond purchases. “My expectation is that they should be concluded early in the third quarter,” Ms Lagarde said at a conference in the Slovenian capital. “The first rate hike, informed by the ECB’s forward guidance on the interest rates, will take place some time after the end of net asset purchases...(and) this could mean a period of only a few weeks.”

She was joining a growing number of ECB policymakers calling for a July hike after inflation hit 7.5 per cent in the euro zone last month and even measures that strip out food and energy prices rose above the ECB’s 2 per cent target. “What started as a one-off shock has now become a more broad-based phenomenon,” ECB policymaker Bostjan Vasle said at the same event. “When the circumstances change, the policy response must follow,” the Slovenian governor added.

ECB board member Frank Elderson also said earlier on Wednesday the ECB may consider a rate hike in July, a move that has also been advocated by Bundesbank president Joachim Nagel among others. Estonian governor Madis Mueller said the ECB’s rate on bank deposits, which is currently -0.5 per cent, may rise above zero by the end of the year for what would be the first time since 2014. “Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year,” he told Reuters in an interview.

Similarly ECB member and Bank of France head Francois Villeroy de Galhau told France Inter radio said Frankfurt will start raising rates gradually this summer.

Inflation soared to a record high of 7.5 per cent in the 19-nation euro currency zone last month, and as a result of this, several ECB policymakers have argued for a rate hike in July.

The war in Ukraine has provided a “negative shock” for the French economy which is also having to cope with “very high” inflation, said Mr Villeroy de Galhau on Wednesday. “Inflation is the principal concern of companies and citizens,” Galhau told France Inter radio.

The Bank of France had said earlier on Wednesday that France will eke out quarterly growth of 0.2 per cent in the second quarter as parts of the service sector recover from a slump induced by the Omicron Covid variant earlier this year.