ANFrom the European Central Bank (ECB) there are more and more voices calling for a rapid rise in interest rates also in the euro zone. This caused the euro to rise significantly against the dollar on Thursday to over $1.09 and at the same time pushed up interest rates in the European bond market. With the 10-year federal bond, German construction interest rates have recently seen an impressive rise to 2.38 percent for 10-year fixed-rate construction loans; until recently, they were just over zero percent.
All of this shows that the turnaround in interest rates in Europe is not a question of if, but only a question of when. Not only the individual governors of the euro countries are now putting pressure on. On Thursday, ECB Vice President Luis de Guindos, a member of the central bank’s Executive Board, officially said in an interview that the ECB could finish buying new bonds in July and raise interest rates in the same month.
That would not contradict the previous communication from the ECB, but it would be the shortest possible time. Bundesbank President Joachim Nagel made a similar statement on Wednesday at the International Monetary Fund (IMF) spring meeting. He had described the end of the bond purchases at the end of the second quarter, that is, in June, and the first interest rate hikes in July as possible. Latvian councilor Martins Kazaks also said: “A rate hike in July is possible.” Councilor Pierre Wunsch of Belgium said a rate hike in July was “certainly a scenario he would consider.”
After all, inflation in the euro zone rose to a record 7.4 percent in the history of the currency union. The European statistics office Eurostat revised an initial estimate from the beginning of the month slightly lower on Thursday from 7.5 percent. Inflation is still well above the ECB’s medium-term target of 2 percent. Energy prices rose particularly sharply with a 44 percent increase. The prices of food, alcohol and tobacco increased 5 percent, while services increased 2.7 percent. In individual euro states, such as the Baltic states, but also in the Netherlands, inflation rates are already in the double digits. Lithuania is now in the lead with 15.6 percent. In the event of a gas embargo, Bundesbank President Nagel also forecast inflation rates for Germany, at least close to double-digit values.
So far, financial markets have expected a rise in interest rates in the eurozone in the fall. With signs of earlier interest rate movement, demand for the euro increased in the foreign exchange market; this was the reason for the increase in the exchange rate against the dollar. Previously, the different orientations of monetary policy between America and Europe had weighed on the common currency. In the middle of the month, the euro fell to its lowest level against the dollar since the spring of 2020. As the US central bank, the Federal Reserve, completed the change in monetary policy and decided to raise interest rates for the first time in March , the euro was weighed down by the hesitation of the ECB.
A stronger euro would tend to make it harder for German exporters to do business because their products would be more expensive on world markets. However, the current difficulties with high energy prices could be cushioned somewhat if a stronger euro made imports cheaper. Clemens Fuest, president of the Ifo Institute, emphasized this again on Markus Lanz’s talk show: “If the euro stabilizes, many imports will become cheaper and that will also help against inflation.”
Holger Schmieding, chief economist at Berenberg-Bank, was cautious about whether he firmly expected a rate hike in July. The range of opinions in the Governing Council remains wide, he said. Perhaps a compromise could be a rate hike in September, Schmieding said. Until now, the ECB had announced the end of net purchases of bonds in the third quarter, that is, the months from July to September, and the first increases in interest rates “some time later” -which, according to the president of the ECB Christine Lagarde was both a week later and a few months later could mean. Lagarde had promised concrete decisions on when net bond purchases should end at the next ECB Council monetary policy meeting on June 9.