Faster rising prices: "Everyone sees the high inflation - and everyone wonders when the ECB will act"

In view of the inflation, which was also fueled by the consequences of the Ukraine war, the ECB is coming under increasing pressure to start moving towards a turnaround in interest rates.

While the American central bank has already initiated this and wants to follow up, the currency watchdogs in Frankfurt will probably remain on hold during the ECB Council meeting next Thursday.

As a preliminary stage to a turnaround in interest rates, they are planning to end their billion-dollar bond purchases in the summer, if possible.

However, the ECB's chief economist Philip Lane is advocating not reacting hastily to the inflation rate in the currency union, which has meanwhile risen sharply, given the looming economic downturn.

“The ECB is in a bind.

It must balance rising inflation with downside risks to growth while economic uncertainties remain high due to the brutal Russian invasion of Ukraine and EU sanctions,” said economist Pietro Baffico of asset manager abrdn.

In a survey, the majority of economists expect that the interest rate hike will not come until the autumn, but some are already expecting it in the summer.

Before that, however, the bond purchases would have to be phased out, at least if the ECB central bankers stick to the order they originally intended: The Dutch central bank chief Klaas Knot is in favor of limiting the volume of purchases as part of the APP bond program in July to ten billion euros and they discontinued at the end of July.

A rate hike in the fourth quarter is "a realistic expectation".

The banks are putting the pressure on

Known as the think tank for monetary policy, the Bank for International Settlements (BIS) in Basel sees a “new era of inflation” looming around the world.

BIS Director General Agustin Carstens urges monetary authorities to tighten the reins.

However, the head of the ECB, Christine Lagarde, who recently tested positive for Corona, is not showing his cards when it comes to the time for the interest rate turnaround, while individual currency watchdogs are loudly considering an increase in September.

Bundesbank head Joachim Nagel, for example, is already saying that savers will soon be able to look forward to higher interest rates again.

Not only many savers, who as bank customers now often have to pay so-called custody fees for higher deposit amounts, are likely to long for the increase.

The banking industry, above all the German private banking association BdB, is also pushing for an end to the negative interest rate policy in the foreseeable future.

In addition, insurers have been railing against the low-interest monetary policy for years.

Talanx CFO Jan Wicke joins the chorus: “Everyone can actually see that we have high inflation.

Everyone is wondering when the ECB will act.

The ECB is a little behind the curve and that is not good.”

In his opinion, the ECB should stop the expansion of the balance sheet immediately: in a second step, the negative deposit rate for the banks could then be set to zero.

This has been minus 0.5 percent for years, while the key interest rate remains at a record low of zero percent.

The Governing Council is keeping the door open for an increase.

He stands ready to adapt "all his instruments" if necessary.

He wants to ensure that inflation stabilizes at the 2.0 percent mark in the medium term.

Most recently, however, inflation was well above the target value at 7.5 percent.

Will the interest rate be readjusted?

At the same time, the consequences of the Ukraine war are making the ECB's decision-making more difficult.

High energy prices and far-reaching Western sanctions against Russia are weighing on growth.

According to ECB Vice-President Luis de Guindos, the monetary union is facing an economic downturn in the short term.

Even if higher interest rates are still some time away, according to Commerzbank economist Michael Schubert, the ECB could turn another screw - namely the so-called graduated interest rate: This is intended to mitigate the side effects of penalty interest for banks.

Schubert points out that the ECB announced in December that the Council would "review the appropriate calibration of its two-tier system for the calculation of interest on reserve balances".

"In our view, the central bank could decide to increase the part of the excess reserves that are exempt from interest at the applicable deposit rate," said Schubert.

Under the then President Mario Draghi, the ECB reduced the deposit rate to minus 0.5 percent in 2019 and at the same time introduced the two-tier system for the graduated interest rate.