The European Central Bank is on track to cut its key interest rate to zero by the end of September, its chair Christine Lagarde said, causing the euro to strengthen and bond prices to fall.
Reporting a quicker removal of its stimulus measures during the crisis than previously reported, Lagarde wrote in a blog Monday that, “based on the current outlook”, the institution was “likely to be able to exit negative interest rates by the end of the third quarter”.
The deposit rate is now minus 0.5% and has been in negative territory since 2014, when the region faced a sovereign debt crisis.
The ECB president is facing growing pressure to accelerate the withdrawal of his ultra-loose monetary policy in order to combat the eurozone’s record inflation. Most analysts now expect the bank to raise rates by at least 0.25 percentage points at its July meeting.
Lagarde wrote: “If we see inflation stabilizing at 2% over the medium term, a further gradual normalization of interest rates towards neutral will be appropriate.”
The neutral level of rates is the optimal level where an economy is neither overheated nor dampened. ECB officials estimate the rate for the euro zone at around 1% to 2% – but economists are divided on whether the central bank will raise rates above that level to restrain demand in a bid to to control inflation.
Lagarde’s comments sent the euro up 0.6% against the dollar to $1.0632, while the yield on German 10-year bonds rose 0.03 percentage points to 0.97%. Bond yields rise when their prices fall.
After inflation hit a new eurozone record high of 7.4% in April, well above the ECB’s 2% target, a growing number of members of its governing council signaled that the first hike in its deposit rate in a decade is likely at its July 21 meeting.
Dutch central bank chief Klaas Knot even said he might consider raising his deposit rate by half a percentage point at the July meeting, which would take it from minus 0, 5% to zero all at once, ending eight years of negative ECB interest rates.
However, Lagarde said gradualism was “a prudent strategy in uncertainty” signaling a preference for quarter-point rate hikes.
“It makes sense to take it step by step, watching the effects on the economy and the outlook for inflation as rates rise,” she added.