ECB exits negative rates amid fears of renewed euro crisis


At a press conference in Amsterdam on Thursday June 9, European Central Bank President Christine Lagarde announced that the bank’s board of governors had “unanimously” decided to stop buying debt. policy and to end negative interest rates by September – two of the main tools used by monetary authorities to control prices and liquidity.

Inflation in Europe reached 8.1% and the bank was under increasing pressure to act.

The bank deposit rate currently sits at -0.5% and will now drop to -0.25% on June 21, at the bank’s next board meeting.

Some of the bank’s most hawkish board members in recent months have increasingly called for higher interest rates, including Dutch central banker Klaas Knot, who stood alongside Lagarde on Thursday.

These bankers expect higher rates to curb inflation.

Rising rates will increase borrowing costs for businesses, households and governments.

This means that the demand for products and services will fall across the board, which will drive down wages and ultimately lead to higher unemployment, lower demand and lower prices.

But former ECB President Mario Draghi told Bloomberg on Thursday that inflation in Europe was not caused by excess demand.

Lagarde also said the move would not limit short-term inflation. 75% of the price increase is “imported”, she told reporters.

Inflation is mainly caused by high energy and food prices, and is also accentuated by China’s Covid lockdowns – things Lagarde has said in the past that the European monetary authority had little input on. influence.

Hot on the heels of skyrocketing government borrowing costs, particularly for Italy where 10-year bond rates rose 0.3 percentage points to 3.7%, nearly three times higher than at the beginning of February.

That has led some, including Robin Brooks, chief economist at the Institute for International Finance, a Washington-based trade group, to fear that a new recession is about to begin.

The last time the ECB raised interest rates in 2011, it sparked a European debt crisis that caused highly indebted member countries, including Italy and Greece, to pay double-digit rates on public loans, which nearly collapsed the union.

No fundamental reform of the European economy has taken place since, and the problems that existed then still exist today.

“If rates were to rise sharply for longer, we could well be facing the Euro 2.0 crisis,” Deutsche Bank investment strategist Maximilian Uleer recently warned.

When Lagarde was asked what tools the ECB has to prevent this from happening again, she pointed out that the €1.7 trillion Pandemic Emergency Purchase Program (PEPP) could be used to refinance the debt of weaker economies.

Lagarde said in a blog last month: “If necessary, we can design and deploy new instruments” to counter borrowing costs for member states, like Italy, that spiral out of control, but when pressed Thursday, she gave no details, a decision criticized by some.

“Better to have a clear strategy in place before spreads get out of control,” ECB watchdog Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, a Brussels-based financial institution, tweeted on Friday.


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