Lagarde: "Additional Inflation Concerns, Rate Hike Is the Minimum Option"

Indication of Possible Interest Rate Hike Within the Year
"ECB May Raise Rates Starting July" Suggested

[Image source=EPA Yonhap News]

[Asia Economy Reporters Hyunwoo Lee and Sojeong Seo] The European Central Bank (ECB) recently expressed concerns over the rapid inflation surge occurring across the Eurozone and globally, hinting at the possibility of interest rate hikes within the year. Following the U.S. Federal Reserve (Fed), the ECB is expected to join the tightening policy stance, prompting central banks worldwide to begin serious monetary tightening.

On the 3rd (local time), the ECB announced that following its monetary policy meeting, it decided to keep the benchmark interest rate unchanged at 0%, and maintain the deposit rate and marginal lending rate at their current levels of -0.5% and 0.25%, respectively. However, it declared that it would slow down the bond purchases under the Pandemic Emergency Purchase Programme (PEPP), which was implemented to counter the economic impact of COVID-19 in the first quarter, compared to the previous quarter, and plans to halt bond purchases starting in March, signaling a shift toward a tightening stance.

The ECB meeting results came immediately after Eurostat announced that consumer prices in the Eurozone rose by 5.1% year-on-year in January, marking the largest increase since records began in 1997.

ECB President Christine Lagarde stated at a press conference, "There is a significant risk that inflation rates will rise further in the short term," adding, "We are closely monitoring inflation figures and will reassess the inflation outlook next month."

President Lagarde explained, "There is overall concern about the impact of inflation on Europeans, making the early end to bond purchases and interest rate hikes the minimum necessary options." Notably, the previous statement from the last monetary policy meeting that "there is no possibility of a rate hike within the year" was not mentioned this time.

Accordingly, analyses suggest that the ECB may raise benchmark interest rates within the year. The Wall Street Journal (WSJ) reported, "In the short-term interest rate market, it is already expected that the ECB will begin raising rates from July and increase rates by about 28 basis points (0.28 percentage points) within the year."

Cedric Gemmel, an economist at U.S. research firm Gavekal, told CNBC in an interview, "If inflation in the Eurozone worsens, the ECB will face pressure to adopt a more hawkish policy and join the Fed's tightening stance. However, since the current inflation in Europe is largely driven by a sharp rise in energy prices rather than strong demand, it is expected to be difficult to implement rapid tightening."

With the hawkish stances of the European Central Bank and the Bank of England, the euro strengthened, and on the 4th, the won-dollar exchange rate fell below the 1,200 won level during trading. The won-dollar rate opened at 1,202.0 won, down 4.4 won from the previous trading day, and has been fluctuating between 1,190 and 1,200 won. This is attributed to the dollar weakening following the Bank of England's interest rate hike overnight. Verbal intervention by the government also contributed to the decline. Lee Eokwon, the 1st Vice Minister of Strategy and Finance, said at the 'Emergency Response Task Force Meeting' that "if necessary, market stabilization measures will be implemented promptly."

This content was produced with the assistance of AI translation services.