Interest rates are likely to rise by half a percent as early as September – ECB President Christine Lagarde


European Central Bank (ECB) President Christine Lagarde has given the clearest indication yet that rate hikes are imminent and will be significant.

In a blog post on the ECB’s own website, Christine Lagarde outlined a rapid path for what she called the “normalization” of interest rates in response to the transition to higher inflation expected over the medium term, which justifies extreme ECB action, including more negative, ending interest rates – from less than zero and quantitative easing (QE) which has pumped money into the economy through mechanisms including an asset purchase program (APP) buying billions of euros in bonds/

“In light of the evidence presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us to raise rates at our July meeting, in line with our forward guidance. Based on the current outlook, we should be able to exit negative interest rates by the end of the third quarter.”

The most important ECB interest rates are currently at -0.5 percent. An exit from negative interest rates by the last day of September would mean rate hikes of half a percentage point – possibly 0.25% each in July and September.

The ECB President’s comments are by far the most explicit yet, lagging behind other major economies including the US and UK in raising interest rates as inflation accelerates this year.

A higher official interest rate will immediately translate into higher mortgage bills for people with tracker mortgages, and standard variable interest rates are likely to follow fairly quickly.

The end of APP asset purchases will raise borrowing costs for governments, which have benefited as the ECB’s loose monetary policy has boosted demand for its debt in recent years.

In her contribution, Christine Lagarde said that due to the recent announcements, investors in the financial markets had reacted in anticipation of the ECB’s moves.

“As a result, investors have gradually updated their expectations of the ECB’s monetary policy intentions. This has been reflected in a revision of interest rate expectations and an upward movement in real interest rates at the longer end of the yield curve. A monetary policy adjustment has thus taken place and has already worked its way through the euro area economy over the past six months.”

However, she said more transparency about the ECB’s plans is now needed.

“But as the expected rate hike date approaches, it becomes more important to clarify the path of monetary policy normalization ahead of us – especially given the complex environment in which monetary policy finds itself in the euro area.” Interest rates are likely to rise by half a percent as early as September – ECB President Christine Lagarde

Fry Electronics Team

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