Lagarde says the ECB will stop having negative interest rates at the end of the third quarter

The euro zone should stop having negative benchmark interest rates at the end of the third quarter of this year, according to the president of the European Central Bank (ECB). In a post on the monetary authority’s blog, Christine Lagarde explains that the rise in prices justifies this timetable for the reversal of monetary policy.

“I hope that the net debt buyback under the APP [asset-purchase program] complete at the beginning of the third trimester. This would allow us to raise interest rates at our July meeting, in line with our ‘forward guidance'”, wrote Christine Lagarde in a publication on the normalization of monetary policy in the euro zone. negative interest rates by the end of the third quarter.”

ECB interest rates are currently at historic lows, with the main refinancing rate at 0% and the interest rate on the marginal lending facility at 0.25%. The rate applied to deposits is indeed negative: at -0.50%.

With Monday’s statements, Lagarde is referring to the latter, which in practice means that banks must pay the money they have deposited with the supervisor. To stop being negative, the rate can thus rise twice (the first in July and the second until the end of September) by 25 basis points each.

In response to Lagarde’s remarks, eurozone government debt yields rose further. German 10-year Bunds rose 2 basis points to 0.957%, while Portuguese bonds of the same maturity rose 1.9 points to 2.136%. The interest rate of the Spanish debt is trading at 2.093% and that of the Italian debt at 2.995%.

The pace and extent of normalization will depend on inflation
The reason for the change is related to price developments. “With the outlook for inflation reversing remarkably from the pre-pandemic period, there is a need to adjust for adjustable variables – and that includes interest rates,” Lagarde said. “This does not constitute a tightening of monetary policy, but keeping rates unchanged in this environment would represent policy easing, which is not necessary at this time.”

The year-on-year inflation rate in the euro zone accelerated to 7.4% in April, after the 7.5% recorded in March. In the European Union, last month, it reached a new all-time high of 8.1%. The surge – compounded by the energy crisis in the region, but also by constraints on supply chains as economies reopen post-pandemic – has led analysts and investors to anticipate that the ECB will accelerate the end of purchases. debt and raise interest rates.

after the end of Pandemic Emergency Program (PEPP) in March, the regular asset purchase program (APP). At the last ECB monetary policy meeting, Lagarde had already announced an acceleration in the decline of the latter with net purchases at a monthly rate of 30 billion euros in May and 20 billion euros in June. Guarantee now that you won’t have to hold later to allow interest rates to rise.

“The next phase of normalization will have to be guided by the evolution of the medium-term inflation ‘outlook’. If we see inflation stabilizing at 2% in the medium term, a gradual normalization of interest rates towards rates But the pace and magnitude of adjustments cannot be determined ‘ex ante’,” Lagarde added.

(News updated at 10:05 a.m.)

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