Battle for higher ECB interest rates in Amsterdam

For some reason, the European Central Bank (ECB) has made a habit of announcing important decisions outside of Frankfurt. Then-bank president Mario Draghi announced the buying of government bonds in a 2014 speech at the Fed's annual conference in Jackson Hole.

He gave his famous 'whatever it takes' speech in London in July 2012. And yesterday (Wednesday 11 May), current ECB president Christine Lagarde announced in the Slovenian capital Ljubljana that the bank will soon raise official interest rates. Lagarde argued that the medium-term outlook for inflation is 'changing' and that it is therefore 'appropriate for monetary policy to return to a more normal position'. The news sites exploded on that. No wonder, Lagarde herself is announcing an interest rate hike, the same Lagarde who, since taking office as the bank's president, has repeatedly portrayed that she does not really feel like a higher interest rate.

monetary mutiny
But why did she suddenly do it on Wednesday? I suspect it has everything to do with her not being able to say anything else. Many of her colleagues have indicated in recent weeks that they will argue for short-term interest rate hikes at the next meeting of the bank. July was mentioned most often. In other words: a monetary mutiny on the way.

In order not to lose her prestige as president, I don't see how Lagarde could say anything in Ljubljana other than what she did. But that it didn't go well, that dripped from the speech. For starters, you can see that clearly in her comment that rate hikes are being implemented 'gradually', a euphemism for painfully slow. She also said that the ECB should first stop buying government and corporate bonds and raise interest rates a few weeks later. Stop buying debt securities is planned for the third quarter, at the beginning of it, Lagarde said in Ljubljana. From this perspective, the interest rate could then be raised during the board meeting on July 27.

Monetary knights decide in Amsterdam
On June 9, the ECB board members meet and receive from their house economists the new estimates of inflation in 2024, the key figure for ECB policy. It would have to be crazy for that figure to be lower than 2%, in other words: the bank's own economists are going to argue that inflation is higher than 2% in the medium term. Since the ECB is targeting 2%, that estimate will imply that action is needed. On that 9 June, the monetary knights of the ECB will in fact decide whether the interest rate will indeed go up in July. And according to the tradition of the ECB, that important decision will also be taken outside Frankfurt. The ECB Governing Council will meet on 9 June in ...... Amsterdam.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.