• The ECB chief said at the beginning of June that rates will go up next month and then again after the summer.
• This would be a huge change for the central bank, which has kept rates below zero since 2014.
• However, it’s not clear if Lagarde will go through with multiple rate hikes because the growth outlook for the region is getting worse.
Philip Lane, the head economist at the European Central Bank, said that the Frankfurt institution will have to stay on guard over the next few months because inflation could keep going up and there is a chance that consumers could slow down the economy in the region.
Lane, who is also a member of the bank’s Governing Council, told CNBC’s Annette Weisbach on Tuesday at the ECB’s Sintra Forum in Portugal, “With the uncertainty, we have to manage the two risks.” “On the one hand, this could be caused by factors that keep inflation higher than expected for longer than expected. On the other hand, there is a chance that the economy will slow down, which would make inflation less likely,” he said.
“So, for the next couple of meetings, it’s very important to have a clear plan and a goal to move away from the very low rates we’ve had for a few years, while also fully understanding how important it is to be data-driven. And to keep the option to react to what we see in the next few months.”
Next month, the ECB will hold a very important meeting. The central bank said it will raise interest rates for the first time in 11 years, but investors are more interested in what the ECB is doing to deal with risks of fragmentation in the region. Early this month, the so-called peripheral European countries had to pay more to borrow money, so the central bank of the euro zone had to meet quickly. The ECB said it would make a new tool to deal with these risks, but the markets didn’t know when it would be used or how far it would go.
People are talking about these things at a time when there is a lot of worry about the economy of the euro zone. The growth outlook is getting worse, and inflation is high. “Can interest rates really go up during a recession, even if inflation is high? Erik Nielsen, the global chief economist at UniCredit, told CNBC on Tuesday that would be unusual.
Early in June, the ECB said that rates would go up next month and then again after the summer. This would be a huge change for the central bank, which has kept rates below zero since 2014. But there are questions about whether Lagarde will actually raise rates more than once, since the growth outlook for the region is getting worse.
Philip Lane said, “Normalisation has a natural emphasis on advancing in increments of 25 basis points, thus rises of 25 basis points at the July and September meetings constitute a benchmark pace.”
A translation of his interview with the Spanish publication Cinco Das was released today on the website of the European Central Bank (ECB). Professor Lane continued by stating that the ECB’s current outlook is for inflation to stay consistent with its 2 percent objective over the medium run.
He confirmed Christine Lagarde’s assertion that euro area interest rates will be in positive territory by the end of September, which is the conclusion of the third quarter of this year. The current deposit rate at the ECB is -0.5 percent.
In June, the ECB predicted that the euro zone’s GDP would grow by 2.8% this year. However, economists are starting to talk about the possibility of a recession by the end of the year because of Russia’s invasion of Ukraine and how that is affecting the world economy.