Eurozone to end negative interest rates within months, Lagarde indicates

The European Central Bank is on track to lift its main policy rate back to zero by the end of September, its president Christine Lagarde has said, causing the euro to strengthen and bond prices to fall.

Signalling a swifter removal of its crisis-era stimulus than previously indicated, Lagarde wrote in a blog on Monday that, “based on the current outlook”, the institution was “likely to be in a position to exit negative interest rates by the end of the third quarter”.

The deposit rate is now minus 0.5 per cent and has been in negative territory since 2014, when the region was facing a sovereign debt crisis.

The ECB president is facing growing pressure to accelerate the withdrawal of its ultra-loose monetary policy to tackle record eurozone inflation. Most analysts now expect the bank to raise rates by at least 0.25 percentage points at its July meeting.

Lagarde wrote: “If we see inflation stabilising at 2 per cent over the medium term, a progressive further normalisation of interest rates towards the neutral rate will be appropriate.”

The neutral level of rates is the optimal level where an economy is neither overheating nor being held back. ECB officials estimate the rate for the eurozone at about 1 per cent to 2 per cent — but economists are divided on whether the central bank will raise rates above that level to constrict demand in an effort to tame inflation.

Lagarde’s comments sent the euro up 0.6 per cent against the dollar to $1.0632, while Germany’s 10-year bond yield rose 0.03 percentage points to 0.97 per cent. Bond yields rise when their prices fall.

After inflation soared to a new eurozone record of 7.4 per cent in April, far above the ECB’s 2 per cent target, a growing number of its governing council members have signalled the first rise in its deposit rate for a decade is likely at its meeting on July 21.

The Dutch central bank chief Klaas Knot even said it could consider raising its deposit rate by half a percentage point at the July meeting, which would lift it from minus 0.5 per cent to zero in one go, ending eight years of ECB negative interest rates.

However, Lagarde said gradualism was “a prudent strategy under uncertainty” signalling a preference for quarter-point rate rises.

“It is sensible to move step by step, observing the effects on the economy and the inflation outlook as rates rise,” she added.

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