The war in Ukraine drives inflation: the ECB flirts with the rate hike

Ukraine war drives inflation
The ECB flirts with the rate hike

For a long time, the European Central Bank considered the high rate of inflation in the euro zone as a temporary phenomenon. But internally there are increasing calls for a change in interest rates. That would be good news, at least for savers.

Given the high inflation, the debate in the ECB about a rise in interest rates is gaining strength. According to newly released minutes of the ECB’s Governing Council meeting in March, participants were internally discussing the conditions for an increase. Many argued that the prerequisites for this were largely or very nearly met. A large number of monetary authorities spoke in favor of additional immediate measures to normalize monetary policy.

The latest central bankers’ statements dovetail with this: From the point of view of Bundesbank President Joachim Nagel, the ECB could now start the swing in interest rates quickly: “What we are seeing now at the current extreme indicates that savers may soon be back to decide on higher interest rates,” he said in ARD. Several currency regulators have pointed to September as the date for discussion.

The key interest rate is currently at an all-time low of 0.0 percent. The deposit rate, a kind of penalty rate for hoarding money at the central bank, is minus 0.5 percent. In a Reuters poll of economists, 31 participants expect this to only increase in the fourth quarter. Ten respondents assume that this will happen in the summer term. And twelve experts do not expect changes.

The eurozone threatens an economic slowdown

Driven by a rise in energy prices as a result of the Ukraine war, inflation in the euro zone rose to 7.5 percent in March. The ECB points to 2.0 percent in the medium term. It meets next Thursday for its next session. According to President Christine Lagarde, she has tested positive for the corona virus, but there is no effect on the work of the ECB. The Frenchwoman wants to work from her home in Frankfurt for the time being until she fully recovers. At the meeting, the ECB has to chart the course in times of the ongoing Ukraine war.

Under previous plans, currency regulators want to end their billions worth of bond purchases in the summer, inflation prospects permitting. The closure of the bond program is seen as a harbinger of a change in interest rates that will start “some time” later. Various currency watchdogs are urging that this be done quickly. However, the fallout from the Ukraine war is making the ECB’s decision-making difficult. High energy prices and far-reaching Western sanctions against Russia are weighing on growth. According to the Vice President of the ECB, Luis de Guindos, the euro zone is facing an economic slowdown in the short term, although a recession is not expected by 2022. The economists surveyed agree: the risk of recession for the year as a whole is estimated by 30 percent on average.


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