ECB Expected to Raise Key Interest Rate as Early as July

[Photo by AFP Yonhap News]

[Asia Economy Reporter Park Byung-hee] According to major foreign media citing nine ECB officials, the European Central Bank (ECB) monetary policy committee members want to end bond purchases as soon as possible and raise the key interest rate as early as July, reported on the 24th (local time). The officials added that the ECB monetary policy committee members definitely want to raise the key interest rate no later than September.

The ECB is currently reducing the scale of bond purchases as slowly as possible. This shows a clear difference in the pace of tightening compared to the U.S. Federal Reserve (Fed). Unlike the Fed, which has already stopped bond purchases, the reason the ECB can still continue bond purchases is that long-term inflation expectations remain below the ECB’s monetary policy target of 2%.

However, at the monetary policy meeting on the 14th, it was shared that inflation expectations are projected to exceed the ECB’s target even in 2024. According to officials, when Philip Lane, the ECB’s Chief Economist, revealed the inflation expectations, applause broke out among the monetary policy committee members. At that time, the ECB concluded the meeting by agreeing to keep the key interest rate at 0% and to bring forward the end of bond purchases to the third quarter.

Earlier this year, ECB President Christine Lagarde did not give a clear answer on whether to raise the key interest rate this year, but on the 22nd, she hinted that the timing of the rate hike could be moved up. President Lagarde said, "Bond purchases should end in early Q3, and the key interest rate will likely need to be raised this year."

According to the nine officials, almost all ECB monetary policy committee members judged that the key interest rate should be raised at least twice this year. A considerable number of officials believed that it should be raised three times.

The market expects the ECB’s key interest rate to increase by 0.85 percentage points this year. If the rate is raised by 0.25 percentage points each time, it implies that more than three hikes are anticipated. If three hikes occur, the ECB deposit rate, currently at -0.5%, will turn positive for the first time since 2014.

However, all ECB officials expressed the view that bond purchases must be stopped first before raising the key interest rate, and that the end of bond purchases should occur before June 30 or July 1. If this happens, the key interest rate could be raised at the first meeting of the second half of the year on July 21.

On the other hand, it is known that a considerable number of officials expressed the opinion that it would be better to wait until September. The last time the ECB raised the key interest rate was in 2011. However, the 2011 rate hike was followed immediately by the European debt crisis, and it is regarded as the worst mistake in ECB history. A source said some officials are concerned that the same mistake might be repeated.

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