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Attempting to counter complaints that the European Central Bank (ECB) is doing nothing to address inflation, bank president Christine Lagarde last week said the bank is likely to raise its key rate a quarter-point next month and another half-point in September.
The decision to announce the raises now was unanimous among the bank’s governing council, Lagarde said.
The rate has lain at -0.50 percent since 2014. A quarter-point raise would still leave it in negative numbers. September’s half-point boost would lift it to a positive rate of 0.25 percent.
The ECB has not raised an interest rate since 2011. It sank the rate to zero in 2012 and then flipped it negative in 2014.
The forecast of a half-point bump in the fall surprised many analysts.
Now “they have reversed the burden of proof,” Frederic Ducrozet, research chief at Pictet Wealth Management, told the Financial Times. “Inflation needs to improve for them not to hike by” a half-point.
Critics have complained that the bank has sat idle while inflation raced to 8.1 percent this year, more than four times above the ECB’s target inflation rate of 2 percent.
The ECB’s September move to positive territory would align it more closely with the U.S. Federal Reserve and also with the Bank of England, which is poised to raise its base rate on Thursday for a fifth time this year.
That would leave Japan and Switzerland with the only two major central banks still employing negative rates.
Previously, Lagarde and ECB chief economist Philip Lane said a quarter-point rise was their “benchmark” for July and September.
However, earlier this month, Lagarde said in a public statement that inflation’s risk is “on the upside,” leading to fears that inflation is becoming embedded in the economy, making it harder to tamp down.
After Lagarde’s announcement, Germany’s 10-year bond rate added 0.09 of a percentage point, rising to 1.45 percent. Investors dumped bonds of weaker economies, with Italy’s 10-year bond yield jumping a quarter-point to 3.62 percent.
The bank also confirmed that it will halt its €20-billion monthly bond purchases at the beginning of July.
TREND FORECAST: At last.
Although the ECB has finally woken from its Rip Van Winkle-style nap, raising interest rates from -.50 percent to -.25 percent is symbolic, not substantive.
Moving rates from negative to positive territory should jolt Europe’s economy slightly this fall, but businesses and consumers will have to adjust after eight years of living in a different financial world.
With Europe’s inflation at 8.1 percent now and the central bank’s interest rate creeping up to 0.50 percent more than two months from now, the rate hikes the bank has announced will have no meaningful impact on inflation.