ECB Signals Change: Rate Hikes Not Off the Table


On Friday, ECB officials stated their commitment to maintaining elevated interest rates for an extended period and even hinted at the possibility of hiking them if necessary. This rhetoric smashes the assumptions of the market players who were betting on a rate cut in the euro area in the near future.

Thursday witnessed the ECB raising its benchmark interest rate to an unprecedented 4%. Nevertheless, given the economic deceleration within the euro area, it is anticipated that this rate hike will mark the end of the current cycle.

Christine Lagarde, president of the European Central Bank, emphasized that any further rate cuts have not been discussed. Data will be used to support future decisions, and timeframes will be established in light of existing circumstances.

Lagarde added that interest rates will remain high for as long as necessary to bring inflation back down to the 2% target.

In a recent speech, the Vice President of the European Central Bank Luis de Guindos cautioned against putting too much trust in market expectations. He stressed that the markets can be wrong since they rely on assumptions that do not necessarily pan out. So, the idea that there will be a reduction in interest rates in June is merely one among several possible perspectives.

While market experts thought the rate hike was dovish, Latvia's central bank governor suggested monetary policy might be tightened again if necessary.

The ECB emphasized that the present interest rates have reached a point where, if maintained over an extended period, they will contribute to steering inflation back to the target level.

In the meantime, Gediminas Imkus, Chairman of the Board of the Bank of Lithuania, has voiced optimism that the European Central Bank will end the rate hike, anticipating that the most recent increase of 25 basis points will signal a final adjustment.

Federal Minister of Finance Christian Lindner supported the ECB's decision, deeming it a rational move and having stressed the government's responsibility to assist the central bank through a moderate restrictive fiscal policy.

The financial markets now believe that there is a minimal chance of the ECB reducing interest rates as early as April, but they do anticipate a full 25 basis point cut by July. However, before that can occur, the European Central Bank will need to consider taking some of the money out of the banking system that it has pumped into over the past ten years in an effort to drive inflation.

Mārtiņš Kazāks, Latvian Economist and Governor of the Central Bank of Latvia emphasized the necessity of eliminating excess liquidity and called for a discussion to precede any considerations of rate cuts.

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