The era of negative rates could be over soon. The European Central Bank (ECB) leaves the door open to a 50 basis point increase in July, should inflation data to be presented in June show higher pressure than year-end forecasts. This is said by Klaas Knot, governor of the Dutch National Bank, stressing that it is possible that the current flare-ups on prices may be more persistent than estimates. The next step will be up to Christine Lagarde, who in the June meeting will have to justify the next moves of the ECB in front of the Governing Council.
The die is cast. The ECB is now moving towards a rate hike in July. The first hint of regime change in monetary policy came in early April, with the German member of the ECB, Isabel Schnabel, who hinted that July could be the right month to start the exit strategy after a decade of extraordinary liquidity. . Then, it was the turn of other members of the Governing Council. Finally, by Lagarde. Which indicated that a first rate hike for over ten years is possible in July because between the end of the net asset purchase program (or App), scheduled for the end of June, and the first rate hike could a few weeks pass and the governors’ meeting is scheduled for July 21st. Crucial date for the future of monetary policy in the euro area, given that with inflation well beyond estimates, the priority is to activate a safety net. According to the latest estimates by the European Commission, the general level of consumer prices will reach 6.1% at the end of the year, a level never seen in recent decades. Of course, largely due to the conflict in Ukraine and bottlenecks in the global supply chains of raw materials, both raw materials and energy ones.
The result of this combined provision, potentially a mix capable of damaging the eurozone economy and slowing down – if not stopping – the expansion of the countries with the most vulnerabilities in terms of public finance, such as Italy and France, is that it is necessary to act quickly so that the outbreak does not become an uncontrolled fire. In this perspective, as Knot explains, we must use pragmatism. “European citizens will still face higher inflation in the coming months,” explains the governor of the Dutch central bank. And with this in mind, there is no shortage of possible exogenous shocks, as happened during the early stages of the Covid-19 pandemic. “I am concerned about the negative impact of the conflict in Ukraine (on the eurozone, ndr) and for the resumption of the pandemic in Asia, ”Knot points out. For the moment, he points out, “I don’t think it will translate into a global recession. Of course, there will be a negative impact and we will have to monitor it very carefully ».
The consequence is that monitoring is required as closely as possible. «The only option we have is to respond by normalizing monetary policy. The first interest rate hike is now being discounted for the July 21 monetary policy meeting and it seems realistic to me, ”Knot explained. But faced with the opportunity of an even more intense crackdown, in the face of a more severe macroeconomic situation than expected, the Dutch central banker did not use mince words or metaphors. “Based on current knowledge, my preference would be to raise our official rate by a quarter of a percentage point. Unless new data arriving in the coming months indicate that inflation is further widening or piling up. In this case, even a greater increase cannot be ruled out. “
The next step is almost taken for granted. If persistence were clear-cut, Governor Knot points out, the next step would be a half-percent increase in the cost of borrowing. The impact on the currency front was significant. Under pressure, following Knot’s comments, the euro closed higher at $ 1.0535 and yen 136.20.