Lagarde: First Interest Rate Step Will Not Immediately Reduce Inflation

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The European Central Bank (ECB) will soon finally raise interest rates again. But that probably doesn’t mean that the high inflation in the eurozone can be ended quickly. Also, people who expect high savings rates again soon should not count themselves as rich, according to the explanation of ECB president Christine Lagarde.

 

At the press conference held in the Amsterdam Hermitage, the Frenchwoman pointed out that the upcoming interest rate hike in July should be seen as part of a “journey”. If interest rates go up slightly, we will not immediately notice that in inflation, she emphasized. The ECB has significantly raised inflation expectations for this year.

Due to the war in Ukraine and disruptions in international transport due to corona lockdowns in China, energy prices have recently skyrocketed and food is also becoming more expensive. The ECB also notices that wage growth is starting to pick up faster, something that could boost inflation later on.

However, Lagarde emphasized that the ECB will do everything it can to ensure that inflation returns to 2 percent in the medium term. That is the goal of the central bank. In her view, the ECB will use all the tools necessary for this. “And we will make it happen,” said Lagarde.

The plan is to raise ECB interest rates by a quarter of a percentage point in July. A further rate hike should then follow in September and the central bank is forecasting a gradual upward path for interest rates going forward.

Lagarde still has a blow to the arm. With any interest rate decision in the coming months, policymakers will be looking closely at the inflation outlook at that time. Lagarde does not yet want to say where the interest will ultimately end up. According to her, policymakers have not yet discussed this in Thursday’s interest rate decision.

Interest rates have been reduced to historically low levels by the central bank over the years. If the ECB starts raising its interest rates, banks are likely to raise their interest rates again. But the savings interest in the Netherlands is still around 0 percent. Whether they ever go back to levels like, say, 4 or 5 percent, remains to be seen. Some economists have previously said that the high-interest rates of the past will not return any time soon due to demographic changes.

The ECB interest rate meeting was held once in the Netherlands. This is because the central bank also regularly wants to show its face in the various euro countries. Lagarde indicated that she finds Amsterdam “beautiful”. President Klaas Knot of De Nederlandsche Bank (DNB) called it an honour that the Netherlands was allowed to act as a host country this time.

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