Even if the European Central Bank’s timetable is actually set, this week could be a surprise. Because just looking at the latest inflation data would justify the first rate hike after eleven years.
In May, inflation in the euro area rose to more than eight percent. In Germany, based on harmonized European standards, it was even 8.7 percent. Frankfurt’s greatest currency keepers have long assumed that inflation rates that have been rising for months were only temporary; misjudgment, it turned out.
“The ECB was a weak indicator of future inflation,” said DW, ING chief economist Carsten Brzeski. “Now the price for the persistent underestimation of the inflation dynamics will be a fast normalization of the monetary policy.”
The timetable is on the table
Top ECB representatives have outlined an action plan in this regard in a number of statements and speeches in recent weeks. First of all, the central bank wants to end the bond purchase program called APP after the corona crisis. From the end of June, no new bonds will be purchased then – in line with the schedule explained by the ECB president Christine Lagarde.
“Whether it will be exactly June 30 or a few days later is ultimately irrelevant. The only important thing is that the bond purchase is over and the path to an interest rate hike at the July meeting is clear, said Commerzbank expert Michael Schubert. Because the order of monetary policy normalization imposed by the ECB itself is: first the end of the bond purchase program, then the first possible interest rate hikes. As the next meeting of the ECB Council after this Thursday will be held on July 23, at the latest the starting rate hike will be recognized.
He has to make difficult decisions: ECB president Christine Lagarde
Bundesbank president Joachim Nagel has recently stressed that this Thursday he must send a clear signal of where the journey is headed. However, the head of the ECB, Christine Lagarde, has already given a clear signal in this direction. It expects to complete its net purchases of securities “in the very early third quarter”. “This would allow us to raise interest rates at our July meeting, in line with our forecasts.”
Banks hate zero interest rates
The BdB banking association has long called for a stronger fight against high inflation. According to an analysis by the Lobby Association of Private Financial Institutions, structural changes will increasingly shape the development of inflation in the coming years – such as labor shortages, the restructuring of the economy towards sustainable development, and the reorganization of global production and supply chains. . According to the association, much can be said that “inflation in Germany and the euro area will run at a much higher pace in the coming years than in the last two decades.”
Zero interest rates are also a salt in the eyes of banks as they generally lower their margins. On the other hand, competitors, e.g. in the USA, benefit from the fact that the local central bank, the FED, has already decidedly initiated a change in interest rates. The Fed has already made the first interest rate hike in March, followed by another step in May by an extraordinary 0.5%. Further rate hikes are likely this year. Other central banks around the world are also reacting to high inflation. For example, the Australian central bank unexpectedly announced on Monday that it would raise its main interest rate by 0.5%.
“High inflation is burdensome for consumers and worries the economy. Inflation expectations are also rising significantly. Negative interest rates have long ceased to fit into this situation, ”said BdB CEO Christian Ossig. Currently, banks have to pay 0.5 percent. interest for parking money at the ECB. These too should go down in history soon, and observers expect negative interest rates to end by September at the latest as part of monetary policy normalization.
This, in turn, should also positively affect bank customers. Because in recent years, more and more banks have been shifting negative interest rates, especially to affluent clients. But savers will also benefit if interest rates rise again. Because then the money saved will be greater. However, there is also a disadvantage: financing for borrowers becomes more and more expensive – for example, home financing, but also financing investments in companies.
However, based on everything that is known so far, the change in interest rates will have to wait until the July meeting. Unless the currency guards surprise with an interest rate hike next Thursday due to extreme inflation. It would be against their own plans. But it could increase confidence in the ECB as an anti-inflation fighter.