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Global Economy

Is the ECB about to turn around interest rates?

The nervousness of investors on the international financial markets can be felt everywhere. The Ukraine crisis in particular has investors firmly in its grip. But now there are renewed concerns about rising interest rates – and this time in Europe.

Did the "hawks" prevail?

Next Thursday, the Governing Council of the European Central Bank (ECB) intends to hold an informal, face-to-face meeting in Paris. Such conversations are not entirely uncommon, but rather rare – especially in times when the corona virus is raging. Speculation is therefore running high that the ECB could set the course for an imminent turnaround in interest rates at the meeting.

A necessary prerequisite would be an end to the bond purchase program. The PEPP program launched in the wake of the pandemic will expire in March anyway. Now more and more council members are in favor of ending the old, slimmed-down program from the times of the financial crisis in September. This is reported by the Bloomberg news agency with reference to insiders. Apparently the hard core of the so-called hawks around the Bundesbank and the Austrian central bank managed to convince other members.

Pressure from the Baltic States

Dissatisfaction is stirring in the Baltic States in particular. Inflation rates there have been in double digits for months. Latvia's head of the central bank, Martins Kazaks, indicated a few days ago that the central bank could act this year if necessary.

Should this happen, the ECB could initiate a turnaround in interest rates at its December meeting by raising the key interest rate from the current zero percent. It would likely be the first of several rate hikes.

The realization of permanent inflation prevails

The trigger for this development is the increasing realization that inflation in the euro zone has developed more strongly than previously expected and is also remaining robust. In January it was 5.1 percent. For months, the currency watchdogs had repeatedly claimed that this was only a temporary phenomenon and that the inflation rate would soon drop significantly again. But since the beginning of the year, the ECB has been gradually moving away from this view.

ECB President Christine Lagarde admitted that the price hikes were more persistent than expected. Recently, she no longer wanted to rule out a turnaround in interest rates. ECB Executive Board member Isabel Schnabel had said the risk of acting too late had increased. In January, the ECB raised its forecast for the inflation rate to 3.2 percent this year – almost twice as high as previously expected. New data will come in March, and some observers are expecting another upward correction.

These developments are viewed with concern on the stock markets: Rising interest rates make fixed-interest securities more attractive than shares, which tends to depress their prices. That's why investors there don't like interest rate hikes at all.

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