The European Central Bank is gearing up for its first rate hike in 11 years. The ECB ‘intends’ to raise the deposit rate for banks, currently minus 0.5 percent, by 0.25 percentage point in July. In September, the central bank wants to raise interest rates again by 0.25 percent, or
by more, if inflation continues to be higher than expected.
This can be deduced from a declaration which the ECB board released after a meeting in the Amsterdam hotel The Grand. Once a year the ECB meets outside Frankfurt, where the central bank is located.
The statement points to a catching-up maneuver by the ECB to tame the sharp rise in inflation (8.1% yoy in May, in the eurozone). The tone about inflation is downright worrying. High inflation is a major challenge for all of us. It is a surprise that the interest rate could already be positive in September (with an interest rate increase that month of more than 0.25 percentage point). The ECB is reacting more strongly than expected to the price increases.
A higher interest rate makes borrowing more expensive. This causes the economy to cool down, which means that price increases must also weaken.
Possible interest on savings again
The statement also states that the ECB will stop buying new government and corporate bonds on 1 July. With this purchase, the ECB is still pushing interest rates on the capital markets, because the bank thus assumes the risk that governments and companies will not repay the loans. At 14.30, Christine Lagarde, the ECB president, explains the decision in a press conference from the Hermitage museum (here to follow).
With the provisional termination of the purchase of government and corporate debt, a program that the ECB started in 2015 will come to an end. Since that year, the bank has bought up almost 5,000 billion euros in debt, more than six times the size of the Dutch economy. Although the purchase of even more debt will soon be over, the debt that has already been bought will remain on the ECB’s balance sheet for the time being.
Also read: The ECB spins in the whirlwind of inflation
With the decisions of the ECB, there is a growing chance that the interest on savings that banks provide – now often zero percent – will pick up again. The mortgage interest rate is already rising, which is linked to the capital market interest rate. The rise in capital market interest rates is due to the fact that the ECB has already scaled back its purchases of government and corporate debt.
In the statement, the ECB says it wants to prevent the interest on government bonds from weak euro countries from rising too much, now that the purchases are stopped. The ECB says it wants to combat ‘fragmentation’. She specifically mentions debt-laden Greece. The ECB is ready to buy up Greek debt to cut borrowing costs, while halting the purchase of debt from other euro countries.
The ECB is also considering maintaining support for countries such as Italy, the statement said. This can be done, for example, by replacing government bonds on the ECB balance sheet that are not from Italy with new Italian ones.