The logo of the European Central Bank (ECB) is pictured in front of its headquarters in Frankfurt, Germany, December 8, 2016. REUTERS/Ralph Orlowski/File Photo
WASHINGTON, April 24 – European Central Bank policymakers are keen to end its bond-buying program at the earliest opportunity and raise interest rates as early as July, but certainly no later than September, said nine sources familiar with the thinking of the ECB are familiar, told Reuters.
The ECB has been withdrawing stimulus as slowly as possible this year, but rising inflation is now putting pressure on policymakers to end their nearly decade-long experiment in unconventional support.
The major stumbling block so far has been that longer-term forecasts still showed inflation slipping back below the ECB’s 2% target, but new estimates shared with policymakers at their April 14 meeting showed inflation even falling 2024 was above target, multiple sources said.
“It was just over 2%, so my interpretation is that all the criteria for a rate hike are now met,” said one of the sources, who declined to be named.
Governing Council members have long criticized the ECB for underestimating inflation, which hit 7.5% last month, and see the new projection as a step towards acknowledging reality.
“When (chief economist) Philip (Lane) presented the numbers, people actually clapped,” another source said.
An ECB spokesman declined to comment.
No policy proposals have yet been tabled and the next ECB meeting is over a month away, on June 9th.
ECB President Christine Lagarde said on Friday that asset purchases should end early in the third quarter and a rate hike is likely this year.
Almost all sources said they see at least two rate hikes this year, but some have argued a third is also possible, although it depends heavily on how markets digest those moves.
Markets are pricing in about an 85 basis point hike this year, more than three 25 basis point moves, which would bring the deposit rate back into positive territory from minus 0.5% for the first time since 2014.
The ECB has long argued that the withdrawal of stimulus is merely a normalization of monetary policy, an undefined concept with no set parameters.
But policymakers speaking to Reuters said normalization should mean returning to the neutral interest rate, which neither stimulates nor stifles growth.
They put this at around 1% to 1.25%, i.e. 150 to 175 basis points above the current price.
“Reaching that level by the end of 2023 might be reasonable,” said a fifth source.
However, interest rates cannot rise until bond purchases are complete and all nine policymakers, who spoke on condition of anonymity, said it should happen on June 30 or July 1.
This would mean that the ECB would be in a position to hike rates before its July 21st meeting.
“Unless the outlook changes dramatically, I would choose July,” said a third source.
However, some of the sources said they would still prefer to wait until September, partly because new forecasts would be available by then and partly to avoid a major policy move during the summer months when liquidity is lower.
The ECB last hiked rates in 2011 on the eve of the bloc’s debt crisis, a move now widely viewed as its biggest policy blunder yet.
“The memory of that move still haunts us,” a fourth source said. “Some people fear making a similar mistake.”
The US Federal Reserve is expected to tighten even faster. Markets see nearly 250 basis points worth of tightening this year, with some sessions due a 50 basis point hike.
However, all ECB policymakers emphasized that the outlook could change radically by then, as the Russian invasion of Ukraine poses an ongoing threat to confidence and the COVID-19 pandemic is also not over.
Some of the policymakers said a technical recession or two straight quarters of negative growth is possible this year, but the full year numbers will still be positive.
Reporting by Balazs Koranyi; Editing by Alexander Smith