Is the turnaround in interest rates approaching?: The ECB is starting to ponder

The European Central Bank left the key interest rate at zero percent. But the record-high inflation rates are now causing even the monetary watchdogs themselves to have doubts about their relaxed course.

At first it looked as if the European Central Bank (ECB) wanted to continue undeterred with its ultra-loose monetary policy. The ECB decision published in the afternoon gave no indication of a change in monetary policy.

Despite the persistently high inflationary pressure in the euro zone, the monetary watchdogs left the key interest rate in the euro zone at a record low of zero percent at today’s ECB council meeting.

“Concern” over high inflation data

However, at the subsequent press conference, ECB President Christine Lagarde struck a much more thoughtful note. There is “unanimous concern” in the Council about the inflation data.

However, it was agreed that no decision should be made without a sufficient data basis. The ECB economists do not want to present new projections for inflation until March. “Inflation is likely to remain elevated for longer than previously thought, but will moderate over the course of this year,” said the Frenchwoman.

Lagarde avoids clear words

While Lagarde had emphasized in December that an increase in the key interest rate in 2022 was “very unlikely”, today the top European currency watchdog avoided making such a clear statement again.

“An initial rate hike this year seems to be a very realistic scenario,” commented Ulrike Kastens, European economist at asset manager DWS.

Two rate hikes over the course of the year?

Especially since Lagarde also underlined at the press conference that inflation in the medium term has come much closer to the ECB’s target of two percent.

“That was perhaps the clearest indication that the ECB will probably raise its key interest rate this year,” says Jörg Krämer. In view of the high inflationary pressure, the Commerzbank chief economist now expects two interest rate hikes in the current year. In September and December, the key interest rate is likely to rise by 25 basis points.

Harsh criticism of loose monetary policy

The previous view of the ECB, according to which the sharp rise in inflation rates was only a temporary phenomenon, had recently been increasingly doubted by economists. Bundesbank President Joachim Nagel, who has been in office since the beginning of the year, also warned when he took office that he “currently sees the risk that the inflation rate could remain elevated for longer than currently expected”.

Friedrich Heinemann from the Leibniz Center for European Economic Research (ZEW) found particularly clear words today: “The Governing Council now risks seriously damaging the reputation of this institution.”

Record inflation in the euro area

The accusation was raised that the ECB, with its long adherence to an ultra-loose course in the face of stubborn inflation, had lost sight of the goal of price stability – in favor of making it easier to finance high government deficits.

Just yesterday, the statistics office Eurostat reported a surprising increase in the inflation rate in the euro area in January to a new high of 5.1 percent. This puts the inflation rate around two and a half as high as the ECB’s target of two percent.

A first departure from the course

With today’s statements, the ECB is now deviating somewhat from its controversial loose course – a step that the US Federal Reserve (Fed) has already taken. The Fed had long since corrected its original assessment that the high inflation rates were only a temporary phenomenon and took appropriate action.

It has been reducing its bond purchases since January, and the first interest rate hike was promised for March. Market players expect the Fed to raise interest rates five times this year. Bank of America experts even expect seven rate hikes in 2022.

The Fed is not the only central bank that sees the time to raise interest rates. The Bank of England raised its key interest rate for the second time today – to 0.5 percent. The stricter monetary policy of the other central banks is now likely to have put even more pressure on the ECB to act.

DAX under pressure, euro picks up

Investors went through an emotional roller coaster ride in the afternoon. A look at the foreign exchange market also shows this: In a first reaction to the ECB decision, the euro fell to a daily low of 1.1272 dollars, but then turned significantly positive after the Lagarde statements. It went up to $ 1.1449.

The strengthening euro reflects the growing interest rate expectations in the euro zone. However, these make investments in equities less attractive. No wonder, then, that the DAX came under pressure after the Lagarde statements. The leading German index closed 1.6 percent lower at 15,368 points.