Euro area interest rates may no longer be negative by end of September, ECB's Lagarde says
By Alexander Bueso
Date: Monday 23 May 2022
(Sharecast News) - Interest rates in the single currency area may well be out of negative territory by the end of September, the head of the European Central Bank said.
Writing in a post on the ECB's blog, Christine Lagarde said she expected net purchases under the central bank´s asset purchase programme to conclude "very early in the third quarter", laying the ground work for a first rate hike in July and an exit from negative rates by the end of September "based on the current outlook".
However, the pace of and overall scale of the next stage of 'normalisation' could not be determined ex ante she stressed, arguing instead for maintaining "gradualism, optionality and flexibility" when adjusting monetary policy.
Lagarde explained that the euro area and global economies had been hit by multiple supply-side shocks which, together with a partial reversal in the structural trends in place prior to Covid-19, had led most measures of inflation expectations to converge on the ECB's target, instead of at the much lower levels seen prior to the pandemic.
Among those changes in trend, the Russia-Ukraine war might well prove to be a tipping point for hyper-globalisation "causing geopolitics to become more important for the structure of global supply chains."
In turn, the war was likely to speed up the transition towards green energies, thus maintaining the pressure on the prices of fossil fuels and for those of rare metals and minerals "although it could cause some other prices to fall" due to the need to roll out those technologies at an accelerated pace.
All told, the lion's share of measures of inflation expectations were becoming centred around the ECB's target, she said.
Nonetheless, "the 'right tail' of the distribution is widening, which is a development we are monitoring closely," Lagarde added.
"All this suggests that, even when supply shocks fade, the disinflationary dynamics of the past decade are unlikely to return. As a result, it is appropriate for policy to return to more normal settings rather than those aimed at raising inflation from very low levels."
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