Rising inflation and fluctuating energy prices are putting pressure on the ECB's interest rate path. The market is searching for direction as Euribor rises and uncertainty surrounding interest rates increases. Read more about the ECB's interest rate path.
There was speculation about the ECB president's early resignation, but she has now personally refuted those rumors. The 70-year-old Lagarde has been in her post since November 2019 and will remain so for the coming years, if it is up to her. Lagarde has no need for distractions in doing so.
The big question currently on the table in Frankfurt is whether the ECB should raise interest rates in the coming months. At the beginning of this year, that did not seem to be the case, but the war in Iran has reshuffled the cards. Due to rapidly rising energy prices, inflation could rise further.
Inflation is rising
In her home country of France, inflation came in at 1,7% last month. While this is acceptable compared to the European target of 2%, it is a clear increase. In January, there was still slight deflation.
The quick estimate by Statistics Netherlands shows that inflation in the Netherlands rose to 2,7% in March, compared to 2,4% a month earlier. This places the rise in the price level slightly higher than the eurozone average, which provisionally stood at 2,5% in March.
Energy, in particular, was the major driver. Prices in other categories may also rise in the coming months as companies pass on the high energy prices. At the same time, this could also be a reason for the ECB not to raise interest rates, in order to avoid further slowing down the economy. A higher interest rate could also Of euro to further reinforce, which has already grown significantly over the past few weeks anyway.
Do not react too late
The ECB's next interest rate decision is on the last day of this month. Late last month, Lagarde already indicated that an interest rate hike might be justified if inflation is slightly above the European target. She intends to vigorously guard the 2% target, she said this week in an interview with Bloomberg.
During the outbreak of the war in Ukraine, more than four years ago, inflation in the eurozone also rose rapidly. At the time, the ECB was criticized for not raising interest rates in time. It does not want to make this 'mistake' a second time, or so it seems to be implicitly saying.
However, many economists do not believe that the key interest rate will rise as early as April, especially since energy prices are falling again now that there is a – albeit fragile – ceasefire. The ceasefire expires early next week. Following failed negotiations between the US and Iran last weekend, both countries will make another attempt to resolve the conflict in the coming days.
Oil price down again, Euribor continues to rise
Meanwhile, unrest persists in the financial markets, although the oil price fell back below $95 per barrel today, the lowest level in a month. The three-month Euribor, on the other hand, continues to rise for the time being and is now trading above 2,2%, the highest level since May last year.
Variable interest rate contracts for financing and leasing are often directly linked to this, meaning users quickly feel the effects. The Euribor is often seen as a market indicator for the expected development of the ECB interest rate, which currently stands at 2,15% for refinancing. For the first time in years, the Euribor is back above that level. The long-term interest rates for five and ten Year-end declines again after a peak in late March, although movements are volatile.
After a period of falling and stable interest rates, it is clear that the war in the Middle East has once again introduced uncertainty into the interest rate trajectory, without it being clear whether and when the ECB will actually intervene.