According to the head of the French central bank, Francois Villeroy de Galhau, there is currently no consensus among the currency watchdogs on the ECB Council for a sharp increase in interest rates by half a point. In his opinion, the central bank in Frankfurt should aim for a neutral interest rate level over the course of the next year, which will neither boost nor slow down the economy in the euro area.
The deposit rate of the ECB is currently minus 0.5 percent. That means banks have to pay fees when parking excess funds with the central bank. Lagarde explained in a well-regarded blog on Monday: “If inflation stabilizes at two percent in the medium term, a gradual further normalization of interest rates towards the neutral interest rate will be appropriate”. It even opened the door for further interest rate hikes “if the euro area economy overheats”.
Lagarde: ECB not panicking
During her television appearance, Lagarde defended the ECB’s monetary policy line, which has been criticized in Germany in particular for being too hesitant, and emphasized that the central bank is not lagging behind and is not panicking either. The US Federal Reserve initiated its turnaround on interest rates in March. At the beginning of May, an increase of half a percentage point followed the new interest rate range of 0.75 to 1.00 percent – the largest jump in interest rates in 22 years. Further jumps in interest rates were promised.
However, the ECB is still buying up bonds and has only signaled a turnaround in interest rates for July, when the purchase program is stopped. According to Lagarde, however, the situation in the US is very different from that in the euro zone. Inflation in the common European currency area is driven by the supply side – for example by more expensive energy in the wake of the Ukraine war and not by a surge in demand. Inflation in the euro zone hit a record 7.4 percent in April. That is more than three times as much as the 2.0 percent inflation that the central bank is aiming for as the optimal value for the economy in the currency area. The pressure on the ECB to tighten interest rates has increased accordingly.
Lagarde sees no recession in the euro area
Despite the war in Ukraine, the European Central Bank (ECB) is currently not assuming a recession in the euro area. “At the moment we don’t see a recession in the euro zone,” ECB President Christine Lagarde told Bloomberg TV news channel at the World Economic Forum in Davos on Tuesday. An economic downturn is currently not the central bank’s baseline scenario. The euro and Bund yields rose after the statements.
Lagarde identified some forces that are acting as a counterbalance to the strains of the Ukraine war. Among other things, she referred to the low level of unemployment and the high level of savings in private households. On Monday, the French announced the first interest rate hike in eleven years for July and an end to negative interest rates for late summer. The US Federal Reserve and the Bank of England, on the other hand, have recently increased their key interest rates significantly.
Frankfurt/Davos (Reuters/dpa-AFX)
Image sources: Jorg Hackemann / Shutterstock.com