Interest rates likely to rise half a percent by as early as September – ECB President Christine Lagarde

European Central Bank (ECB) President Christine Lagarde has given the clearest indication yet that interest rate rises are imminent and will be substantial.

n a blog post on the ECB’s own website Christine Lagarde outlined a rapid path for what she called ‘normalisation’ of interest rates in response to the shift to what’s expected to be higher inflation over  the medium term which ends the justification for extreme ECB measures including negative interest rates – of less than zero and quantitative easing (QE) which has been pumpin money into the economy through mechanisms including an asset purchase programme (APP) which buys billions of euro of bonds/

“Against the backdrop of the evidence I presented above, I expect net purchases under the APP to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”

The main ECB interest rates are currently -0.5pc. Exiting negative interest rates by the last day of September would mean rate rises of a half percentage point  – potentially of .25pc each in July and September. 

The comments are by far the most explicit to date from the President of the ECB, which has lagged behind other major economies including the US and the UK in lifting rates as inflation raced ahead this year.

A higher official rate will immediately translate into higher mortgage bills for people with tracker mortgages and  standard variable rates are likely to follow fairly quickly. 

Ending the bond buying under the APP will push up borrowing costs for governments that have benefited as the ECB’s loose monetary policy increased demand for their debt over recent years. 

In her post Christine Lagarde said investors in financial markets have been reacting in anticipation of the ECB’s moves as a result of recent communications.

“As a result, investors have been progressively updating their expectations of the ECB’s policy intentions. This has been reflected in a revision of interest rate expectations and an upward shift in real rates at the longer end of the yield curve. A policy adjustment has thus already been working its way through the euro area economy over the past six months.”

However, she said more transparency is now needed about the ECB plans.

“But as the expected date of interest rate lift-off draws closer, it becomes more important to clarify the path of policy normalisation that lies ahead of us – especially given the complex environment that monetary policy in the euro area is facing.”

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