ECB’s Lagarde gains key allies for rate hike plans

European Central Bank (ECB) President Christine Lagarde gained key allies for her plan to raise rates out of negative territory this summer, even as one of her own board members on Wednesday, May 25, expressed some skepticism about the policy path ahead.

With inflation broadening, Lagarde said this week that the ECB’s -0.5% deposit rate should start rising in July and could be at zero or “slightly above” by the end of September before rising further “towards the neutral rate.”

Dutch central bank chief Klaas Knot, among the most conservative members of the ECB’s Governing Council, said he fully backed this plan and Olli Rehn, Finland’s central bank chief, also voiced support for rate hikes in the summer, as did the ECB’s own chief economist Philip Lane.

“I’m fully on board, I fully support everything that is in the [Lagarde] blog, I think it nicely charts the policy course,” Knot told a World Economic Forum panel in Davos.

Knot earlier said that a 50-basis-point rate hike in July should remain a possibility but his comments on Wednesday suggest support for smaller, 25-basis-point moves, in line with Lagarde’s call for gradualism.

Speaking in Helsinki, Rehn, considered by some to be a policy “dove” who favors lower rates, said he also supported 25-point rate hikes in both July and September.

Lane said the rate hike path sketched by Lagarde for the summer was “clear and robust” but he cautioned that any move beyond September will depend on how inflation pans out and the impacts of the war in Ukraine.

Earlier this week, the central bank governors of Austria and Latvia both said that a 50-basis-point rate hike should be an option in July, indicating that a 25-basis-point increase is not yet a done deal.

Fabio Panetta, an outspoken dove, took a somewhat different view, arguing that policy normalization should not be equated with getting interest rates back to a neutral setting. Instead, he said the aim should be to cement the inflation at the ECB’s 2% target.

“Normal does not mean neutral…the normalization process should not be assessed against unobservable reference points, such as the natural or neutral rate of interest,” Panetta said in a speech in Frankfurt.

Others, including French central bank chief Francois Villeroy de Galhau, an influential centrist voice, have also argued that the neutral rate is a key reference point in policy normalization.

The nominal neutral rate is estimated to be between 1% and 2%, or 150 to 250 basis points above the current -0.5% deposit rate, suggesting that the ECB could raise rates well into next year before approaching this level.

Backing up his argument for caution, Panetta also said that the growth outlook is clearly weakening, a view Rehn appeared so share when he said the ECB was likely to cut its growth projection next month. – Rappler.com