The ECB is reacting to the high inflation later than other major central banks. And the extent of the interest rate hikes should initially be less than in the USA, for example.
According to the head of France’s central bank, the European Central Bank (ECB) is heading towards more gradual interest rate hikes.
An increase of 0.5 percentage points is currently not a consensus in the Governing Council, French central banker Francois Villeroy de Gallhau told the news channel Bloomberg TV on Tuesday at the World Economic Forum in Davos. That speaks for rate hikes of 0.25 points.
The day before, ECB President Christine Lagarde had announced the first interest rate hike in eleven years for July and signaled an end to negative interest rates by late summer. “It will be a normalization of our monetary policy, it is not a tightening,” said Villeroy. “What we do is take your foot off the gas pedal.” Lagarde had previously said in Davos that the ECB should not rush into anything monetary policy or even panic.
Villeroy said the pace of the monetary policy turnaround would depend on inflation and economic data. The aim is to bring the key interest rate to a “neutral” level next year, which the Frenchman expects to be between one and two percent. The neutral or natural policy rate is a type of equilibrium rate where neither inflation nor economic growth dominates.
The background to the change in monetary policy in the euro area is the high inflation rate of 7.4 percent recently. Compared to other central banks, the ECB is reacting late to the surge in interest rates by raising interest rates. The US Federal Reserve has raised interest rates twice, most recently by 0.5 points. Other central banks such as the Bank of Canada and the New Zealand central bank have recently raised their key interest rate to the same extent in order to react as decisively as possible to the high inflation.
