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Lagarde’s Rate Plan Wins ECB Backing But Big Hikes St...

Business Maverick

Business Maverick

Lagarde’s Rate Plan Wins ECB Backing But Big Hikes Stay in Play

Christine Lagarde, president of the European Central Bank (ECB), during a panel session on day three of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, May 25, 2022. The annual Davos gathering of political leaders, top executives and celebrities runs from May 22 to 26.
By Bloomberg
25 May 2022 0

European Central Bank colleagues lined up to back President Christine Lagarde’s plan to exit negative interest-rate policy by the end of the third quarter, though some stressed that more aggressive action can’t be ruled out. 

Following initial noises of alarm from hawkish officials earlier this week that the ECB chief’s signal for two quarter-point rate hikes in July and September seemed to exclude bigger moves, several policy makers declared support for her roadmap.
The ECB hasn’t raised rates in more than a decade

They included two of Lagarde’s Executive Board colleagues, who backed a timetable that also encompasses an end to bond buying in the weeks after the June 9 decision.

ECB Vice President Luis de Guindos told Bloomberg Television on Wednesday that the schedule was “very sensible,” while Chief Economist Philip Lane described it as “clear” and “robust policy.” Meanwhile, Dutch central bank Governor Klaas Knot, a veteran hawk, declared that “I fully support everything that is in the blog” that Lagarde wrote on Monday.

He later added that raising rates by 50 basis points in July to reach zero immediately is “clearly not off the table” and insisted that option is consistent with her plan. Such an approach to tightening would echo the increased aggression against inflation that the US Federal Reserve adopted this month when it hiked by that amount.

The ECB has taken longer to embrace tightening than global peers, maintaining that surging consumer prices are largely caused by supply shocks such as the spike in energy costs after Russia’s invasion of Ukraine. But surprisingly fast inflation of almost four times the 2% target has nudged officials to pledge action.

The flurry of remarks on Wednesday provided further evidence of how far the ECB’s discussion has progressed. Even normally more dovish policy makers such as Olli Rehn are seeking a rate hike in July, and the debate is now focused on speed, quantum, and even toward how high borrowing costs should ultimately rise.

Already last week, Knot broke ranks to air the possibility of raising rates by 50 basis points if the inflation outlook worsens. In interviews in the past two days, Latvia’s Martins Kazaks agreed that such an increase could be discussed, while Austria’s Robert Holzmann insisted it’s already “appropriate.”

Guindos doesn’t rule out such a scenario either. Asked whether the deposit rate could already be positive by September, which would warrant at least one rate hike of more than the conventional quarter point, he said “it will depend on the outlook.”

“Let’s see what happens,” the vice president said. “You know we are data dependent — and we always stress that part.”

Lagarde herself appeared not to rule out raising the deposit rate above zero in the third quarter, telling Bloomberg TV at the World Economic Forum in Davos that “when you’re out of negative, you can be at zero, you can be slightly above zero.”

A sobering note was provided by Bank of France Governor Francois Villeroy de Galhau, also in Davos, who insisted on Tuesday that a half-point move “is not part of the consensus at this point.”

Rehn is more in that camp. The Bank of Finland governor said the ECB should raise its deposit rate a quarter point in July and to zero “as the autumn comes.”

How the debate progresses from here will depend on the data. Knot noted that officials will get two more monthly inflation readings before their July meeting that could impact their decision, and said underlying price measures and inflation expectations would be key.

Meanwhile Executive Board member Fabio Panetta, one of the ECB’s most dovish policy makers, backed the prospective end of negative rates, but provided a warning that economic developments could well force officials to be more cautious.

“Signs of economic stress are emerging in the hard data — signs which may become more visible in the coming months,” he said in a speech. “Pre-committing to further steps — just like ruling them out — seems unnecessary and unwise.”

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