Savers and investors will have been pleased yesterday with the news from the European Central Bank. This is how ECB president Christine Lagarde held out the prospect of raising interest rates. On the central bank's blog, it published a statement with more concrete details. Interest rates are expected to start moving upward in late summer.
- ECB chief Lagarde held out the prospect of a first rate hike starting in July in a blog post published Monday.
- Interest rates could be back above zero by around the end of September, ending the era of negative interest rates.
- One reason for raising the key interest rates is high inflation.
A rate hike has been discussed for some time now. However, so far it has been more wishful thinking and not a plan for the future. Yesterday, Monday (23.05.22) Christine Lagarde, the president of the European Central Bank (ECB), expressed itself however in a Blogbeitrag on the Website of the ECB quite concretely to an interest rate turn of the ECB. Accordingly, Lagarde expects that the ECB at its meeting in July 2022 could enable the increase in interest rates. According to current assumptions, the central bank "is likely to be able to end negative interest rates by the end of the third quarter." This would mean the end of negative interest rates as of the end of September.
Interest rate turnaround at the ECB: Bye, bye negative interest rates?
Which key interest rates the ECB wants to raise is not yet clear from the current statements. "The" key interest rate, i.e. the main refinancing rate, has been at 0 percent since 2016. It is important for banks because it determines the interest rate at which banks can borrow money from the ECB.
For savers, however, the deposit rate is more interesting. This is currently at the ECB at minus 0.5 percent. The negative interest rate means that banks and savings banks have to pay a so-called custody fee to the central bank when they deposit funds with the central bank. Many credit institutions have now passed on these costs to their customers.
High inflation as reason for higher interest rates
Lagarde justifies decision to raise key interest rates with high inflation. This has risen in the euro zone within the last few months from 5.1 percent (January) to currently 7.4 percent. The ECB, on the other hand, is aiming to keep inflation stable at 2 percent. If this is successful, interest rates could gradually normalize again to a neutral level, the ECB chief holds out the prospect.
Step forward in the right direction
Bundesbank President and ECB Governing Council member Joachim Nagel assesses Lagarde's announcement as "the right step to reduce uncertainty," as WirtschaftsWoche reports. In view of the high inflation, the central banks "would also have to withdraw monetary policy support from the economy.", Nagel further explained. Accordingly, the expectation that the ECB will act in the face of inflation is also very high in the ECB Governing Council.
What does the interest rate hike mean for consumers?
An increase in the prime rate means that taking out a loan will become more expensive. Anyone who wants to take out a loan will have to reckon with higher costs after the interest rate hike.
An increase in the deposit rate is a benefit to savers. Especially when the interest rate is back in positive territory. For this not only means that more interest is in prospect again for savings balances. The custody fee or negative interest rates that many banks and savings banks charge customers will then also no longer have a basis.