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Christine Lagarde, president of the European Central Bank (ECB), once again rejected calls for the bank to raise its base interest rate from its current -0.50 percent, where it has remained since 2014. (See “ECB: More Monetary Methadone,” 27 Apr 2021 and “ECB Pledges to Keep Rates Lower Longer,” 27 Jul 2021, among other articles.)
Pressure has been growing on the bank to boost rates, with Europe’s inflation running at a multi-decade high of 5 percent and other central banks, such as those in Norway and the U.K., already raising their rates, as we reported in “Norway Becomes First ‘Group of 10’ Countries to Raise Interest Rates” (28 Sep 2021) and “European Markets: Higher Rates Impact” (21 Dec 2021).
Critics also have called for the bank to stop stimulating the region’s economy by buying bonds.
However, raising rates too soon would risk “putting the brakes on growth,” Lagarde said in a France Inter radio interview last week, and added that “the cycle of economic recovery in the U.S. is ahead of that in Europe,” so the ECB “has every reason not to act as quickly or as ruthlessly” as the U.S. Federal Reserve, which will end its bond purchases within weeks and could raise interest rates before April.
Instead, she said, the bank’s monetary policy will act as “a shock absorber” against rising prices.
Also, the bank will continue buying bonds through most of this year, Lagarde said last month.
At its December meeting, the ECB’s governing committee agreed “substantial monetary support is still needed,” but is divided over how fast inflation will ease and when the bank should begin to wind down its bond purchases.
In particular, some disagreed with the decision to boost monthly bond purchases from €20 billion to €40 billion in an existing program to offset effects of the end of the bank’s €1.85-trillion bond-purchasing program that ended in December, as we noted in “Europe’s Central Banks Diverge on Stimulus Policy” (21 Dec 2021).
However, despite the bank’s continuing stimulus spending, inflation will ease soon across Europe and fall below the bank’s 2-percent target rate by the end of this year, Lagarde predicted.
Financial markets lack her optimism and have priced in two 0.1-percent rate hikes by the ECB this year.
TREND FORECAST: Should oil and natural gas prices continue to rise and inflation stay in the 5 percent range, the ECB will raise interest rates. As with the U.S. Fed, they will play the game of not raising rates to keep equities from tanking, and then raise them when inflationary pressures can no longer be denied.