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In July, the European Central Bank might increase interest rates for the first time in more than a decade, according to Governing Council member Ignazio Visco.
In an interview with Bloomberg Television, Visco said that we can move slowly, raising interest rates in the coming months. While June is too early to start as the end of net bond purchases by the ECB, we will move after that, which means maybe July. There is growing alarm about record inflation, with consensus building to raise borrowing costs in July. Visco is considered one of the more dovish Governing Council members.
Now I think that we can move out of this negative territory," Visco said, referring to the deposit rate, which has been below zero since 2014. I think that we have to understand that we should move without creating uncertainty in the market. Money market bets on ECB policy tightening were broadly steady, pricing 34 basis points of rate hikes by July and four quarter-point increases by year-end. German two-year bonds, which are the most sensitive to monetary policy, briefly erased declines before yields rose one basis point to 0.39%.
With most major global central banks already lifting borrowing costs, more dovish ECB officials like Spain s Pablo Hernandez de Cos have said that a first hike should happen shortly after net bond-buying ends early in the third quarter.
Consumer prices in the euro-zone went up 7.4% from a year ago last month, holding an all-time high, according to data released this week. The most important factor for monetary policy is inflation expectations, because it would be very damaging, said Olli Rehn, a Governing Council member.
The idea of lifting rates by half-point if inflation data worsens is being proposed by Visco's Dutch colleague, Klaas Knot, as a first Governing Council member.
Analysts polled by Bloomberg believe that there will be a first increase of half that magnitude. They said that the deposit rate will be above zero this year, aligning their views with the increased sense of urgency among ECB officials.
Visco said on the sidelines of the G- 7 finance chiefs meeting near Bonn there have been many voices in the last few weeks and I try to refrain from intervening too much. But I think we should consider very carefully what we should do on the basis of the data but also a careful analysis of what is going to come.
There is an uncertain economic backdrop that includes the risk of 1970s-style stagflation that complicates policy makers task. Business and household confidence has been hit by soaring prices and Russia's invasion because of the war and China's Covid Zero strategy.
Estonian Governing Council member Madis Muller said earlier on Friday that policy makers must act to combat inflation while his Latvian colleague Martins Kazaks said he hopes the first rate hike will come in July.
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Nobody in the UK is about to become a Stagflation Nation.