In the fight against persistently high inflation, the currency watchdogs of the European Central Bank (ECB) are discussing the seventh interest rate hike in a row in Frankfurt today. Most economists believe it is likely that euro watchdogs will ease off the gas and raise key rates by just 0.25 percentage points this time.
But a further increase of half a percentage point, as in the previous three interest rate meetings, is not entirely off the table from their point of view. A compromise could be a smaller move higher: around 0.25 coupled with a signal from Fed Chair Christine Lagarde that the ECB is not yet at the end of the road with its tightening stance.
Zinswende Not 2022
In July 2022, after years of ultra-loose monetary policy, the monetary watchdogs implemented the turnaround on interest rates. Since then, they’ve increased key rates by a total of 3.50 percentage points at a rapid pace.
The deposit rate, which is trend-setting on the financial markets and which financial institutions receive from the central bank for parking excess funds, is now three percent. With a small rate hike, which is expected on the stock exchanges with a probability of around 80 percent, it would rise to 3.25 percent.
Rate hikes are slowly taking effect
According to economists, the fact that the previous interest rate increases are slowly taking effect speaks for a slower pace. The gross domestic product (GDP) in the euro zone in the first quarter grew only minimally by 0.1 percent compared to the previous quarter. In addition, the latest ECB survey of banks on lending shows that corporate demand for loans is already weakening.
On the other hand, inflation of seven percent in April in the euro area is still a clear indication that the monetary authorities’ work is far from over. The rate is more than three times higher than the central bank’s target of two percent.
