The European Central Bank (ECB) could raise interest rates from July at the earliest, Latvia’s banking governor Martins Kazaks said in an interview with the financial news agency Bloomberg on Wednesday.
He points to the “significant” inflation risk, which will require monetary policy to tighten later this year. This would be the first-rate hike in the eurozone in more than ten years.
The deposit rate – the interest that banks have to pay to park money at the ECB – is currently at -0.5 percent, and, according to Kazaks, there is a good chance that it will be zero by the end of the year. “I wouldn’t dispute any bets on it,” he is quoted as saying by Bloomberg.
“A rate hike in July is possible, and I have no reason to dispute market prices for the second half of the year,” it said. “We are on a solid road to normalization, moving step by step towards zero and beyond.”
Inflation in the eurozone is at a record 7.5%, and there are no signs yet of it levelling off. This increases the pressure on the European Central Bank to tighten its loose monetary policy. The ECB aims for an inflation rate of just under 2 percent. According to Bloomberg, the chance of a rate hike in July is estimated at more than 50 percent. After that, interest rates would be raised further in September and December. Although the war in Ukraine still causes headaches because it weighs on economic growth.
“Gradually does not mean slow,” the National Bank of Latvia governor said of the ECB’s policy. “It mainly means that you check whether the measures taken are appropriate.” According to Kazaks, rate hikes by 25 basis points “seem the most appropriate”, although larger steps could be discussed depending on economic data.
The end of the bond-buying program is already on the agenda at the ECB meeting in early June. “We have not seen significant stress elements in the financial markets, which makes me think that ending QE in the third quarter would be possible and appropriate,” Kazaks said. “Whether it will happen by the end of June is yet to be discussed when we get the new outlook.” As potential risks to the economic outlook, he pointed to a new surge in the coronavirus pandemic, supply chain disruption and the war in Ukraine.