Saturday

25th Mar 2023

Lagarde signals summer interest rate hike

  • "It is appropriate for policy to return to more normal settings," Christine Lagarde said on Wednesday (Photo: Council of the EU)
Listen to article

In a speech celebrating the 30th anniversary of the Slovenian Central Bank, European Central Bank (ECB) president Christine Lagarde said on Wednesday (11 May) that the bank will increase interest rates in the eurozone "some time after the end of net asset purchases," which is set for the third quarter.

Although choosing her words carefully, experts took this as the clearest signal the bank is set to hike rates sooner rather than later.

Read and decide

Join EUobserver today

Become an expert on Europe

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

"To sum up Lagarde's speech: first rate hike on 21 July," ING's global head of macro, Carsten Brzeski, tweeded in response, referring to the ECB's council meeting that day.

But Lagarde did not put a date on the decision yet, noting that growth in the eurozone is "uncertain."

The ECB has held off increasing interest rates for far longer than the US Federal Reserve and the Bank of England, which have already increased borrowing costs, with high-ranking members of the Frankfurt-based EU bank's governing council speaking publicly against such a move.

Last Thursday (5 May), executive board member Fabio Panetta told Italian press that it would be "imprudent" to raise rates without "fully understanding" how the economy will develop in the second quarter.

ECB chief economist Philip Lane in a separate speech the same day, also said higher borrowing costs are risky.

The last time the ECB raised interest rates in 2011, it caused a European debt crisis resulting in highly-indebted member countries — notably Italy and Greece — paying double-digit rates on government loans, which nearly collapsed the union.

"If rates were to rise sharply for longer, we might well be facing Euro Crisis 2.0," Deutsche Bank investment strategist Maximilian Uleer told Reuters on Tuesday.

For now, hawks have won the debate, which has been raging behind closed doors for weeks and recently came to a head when Finland's Olli Rehn, Austria's Robert Holzmann and Belgium's Pierre Wunsch openly called to increase rates as early as July, with the latter describing the move as a "no brainer."

"It is appropriate for policy to return to more normal settings," Lagarde said on Wednesday, noting that it is unlikely that the consistently low inflation of the last decade will return.

But growth in the eurozone has come to a virtual standstill caused by record-high energy prices and the outfall of the Russian invasion of Ukraine, which limits ECB action.

Slowing down asset purchasing from its pandemic high of €160bn-per-month to zero in the third quarter has already driven up borrowing costs for member states from zero to 1.5 percent for 10-year bonds on average, with Italy and Greece paying three and 3.5 percent respectively.

With more economic uncertainty on the horizon, the difference in borrowing rates between EU members may escalate further, threatening the stability of the union.

Lagarde reiterated the ECB's commitment to the stability of the EU, saying all rate increases will be "gradual", but according to Robin Brooks, chief economist at Washington based Global Association of the Financial Industry, all rate hikes at this point are a bad idea.

"The eurozone is going into recession. Inflation is yesterday's worry. Don't hike," he tweeted on Monday.

Analysis

Can the ECB solve climate change and inflation on its own?

The European Central Bank operates independently - with good reason - but in cases like climate policy more coordination with democratic authorities are needed, two influential economists have argued.

Analysis

An inflation surge, but (some) economists warn on raising rates

Rising prices have fuelled the debate among economists about inflation risk - with some arguing that central banks should increase interest rates, while others urge governments and central banks to adopt more precise and targeted measures.

Analysis

ECB rate-setting versus green climate goals

Following the European Central Bank's unanimous decision earlier this month to end negative interest rates by September, nervous private investors and speculators immediately started selling their government bonds.

Opinion

EU's new critical raw materials act could be a recipe for conflict

Solar panels, wind-turbines, electric vehicle batteries and other green technologies require minerals including aluminium, cobalt and lithium — which are mined in some of the most conflict-riven nations on earth, such as the Democratic Republic of Congo, Guinea, and Kazakhstan.

Latest News

  1. EU's new critical raw materials act could be a recipe for conflict
  2. Okay, alright, AI might be useful after all
  3. Von der Leyen pledges to help return Ukrainian children
  4. EU leaders agree 1m artillery shells for Ukraine
  5. Polish abortion rights activist vows to appeal case
  6. How German business interests have shaped EU climate agenda
  7. The EU-Turkey migration deal is dead on arrival at this summit
  8. Sweden worried by EU visa-free deal with Venezuela

Stakeholders' Highlights

  1. Nordic Council of MinistersNordic and Baltic ways to prevent gender-based violence
  2. Nordic Council of MinistersCSW67: Economic gender equality now! Nordic ways to close the pension gap
  3. Nordic Council of MinistersCSW67: Pushing back the push-back - Nordic solutions to online gender-based violence
  4. Nordic Council of MinistersCSW67: The Nordics are ready to push for gender equality
  5. Promote UkraineInvitation to the National Demonstration in solidarity with Ukraine on 25.02.2023
  6. Azerbaijan Embassy9th Southern Gas Corridor Advisory Council Ministerial Meeting and 1st Green Energy Advisory Council Ministerial Meeting

Join EUobserver

Support quality EU news

Join us