The Monetary Institute will increase its key rates for the first time by 0.25 points in July, then a second time in September, from 0.25 or 0.5 points. It will get out of the era of negative rates in place since 2014.
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“High inflation is a major challenge for all of us.” The first sentence of Christine Lagarde, during her press conference Thursday, June 9, marked a profound change in tone. Prices are now strong everywhere in the euro zone, and the European Central Bank (ECB) intends to do everything to control it. “Inflation is too high and we have to reduce it,” added its president.
Consequently, the ECB is committed to increasing its guiding rates (the deposit rate is −0.5%) twice by September. A first increase of 0.25 point will take place at its meeting on July 21. A second increase, the magnitude of which remains to be decided (it will be in principle 0.25 point or 0.5 point) will follow in September. The euro zone will therefore leave the era of negative rates on this date.
This is a turning point for monetary policy: the Frankfurt Institute will raise its rates for the first time since 2011. The deposit rate had become negative in June 2014, gradually sinking until – 0.5 % at the end of 2019, level where it is still currently.
Lagarde recognizes “an error”
Such an ad is very unusual for a central bank. In this felted world, we normally give indications, we make people understand, but we do not declare in advance what will be the decisions of future meetings of the Council of Governors. The break with routine communication indicates the extent of the pressure under which the ECB is located. Inflation is flame in the euro zone, exceeding every month every expectations. In May, it was 8.1 %, unheard of since the creation of the monetary union. In six countries, it exceeds 10 %, even reaching 20 % in Estonia. The ECB, whose mandate is to ensure price stability around 2 %inflation, had to act.
After the “whatever it costs” announced by Mario Draghi in 2012 to calm the crisis of public debts, M Me Lagarde uses today a kind of “whatever he costs “to calm prices. “The Council of Governors will ensure that inflation will return to 2 % in the medium term,” she said repeatedly. The president of the ECB wants to cut short the idea that the “doves”, nickname given to the governors favorable to a rather lax monetary policy, have high hands on the central bank, and that inflation is secondary.
It was time, will answer the “hawks”, favorable to a stricter approach. Many accuse the ECB of having been too long to understand the extent of the pricing. M Lagarde recognizes an “error” in his forecasts, but underlines that it comes “from unpredictable events”. The first was the release of the pandemic, which caused total disorganization of the logistics chains. The second is of course the war in Ukraine, which took off the prices of oil, gas and agricultural raw materials.
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