The European Central Bank (ECB) is clearing the way for the first interest rate hike in the euro area in eleven years.

At an away meeting in the Netherlands on Thursday, the Governing Council of the ECB decided to let the Eurosystem's central banks' net bond purchases expire this month.

After that, the central bank wants to raise interest rates in July.

The negative interest rates introduced by former ECB President Mario Draghi in 2014 could then be history as early as September.

Christian Siedenbiedel

Editor in Business.

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The Governing Council announced after the meeting: “The Governing Council decided to end net asset purchases under its asset purchase program (APP) as of 1 July 2022.” by 25 basis points at its July policy meeting, in line with the sequence of actions set by the Governing Council.

"Looking ahead, the Governing Council expects to raise key ECB interest rates again in September - the calibration of this rate hike will depend on the updated medium-term inflation outlook," it said.

Beyond September, based on its current assessment, the Council believes that a "gradual but sustained" path of further rate hikes will be appropriate.

A turning point for the euro area: After many years of unconventional monetary policy with negative interest rates and bond purchases, the central bank wants to use it to normalize its monetary policy.

There are still no interest rates in sight like in previous years - but the path towards slightly higher interest rates has been set.

According to calculations by the ZEW research institute, if the ECB stops buying additional bonds at the end of the month, it will have purchased paper worth EUR 4.4 trillion.

The ECB wants to proceed “gradually” with rate hikes

Recently, there had been considerable discussion as to whether the ECB was too late in tightening monetary policy and whether it might be proceeding too cautiously.

ECB President Christine Lagarde had repeatedly emphasized that the central bank wanted to act "flexibly" and "gradually".

There had also been debates among members of the Governing Council of the ECB as to whether the first rate hike should be 0.25 percentage points - that would be a more cautious approach - or 0.5 percentage points - that would be a somewhat sharper intervention.

The latter is now off the table.

In July it should be 0.25 percentage points.

Speaking of the September meeting, it said: "If the medium-term inflation outlook holds or deteriorates, a larger hike will be appropriate at the September meeting."

In the United States, the Federal Reserve (Fed) had started the turnaround in interest rates with 0.25 percentage points, but then raised the key interest rate by 0.5 percentage points in the second step.

Recently, there has been little public understanding that the ECB is posting a deposit rate of minus 0.5 percent, even though inflation has meanwhile risen sharply.

The heads of the major German banks had also vehemently criticized this several times.

In May, the inflation rate in the euro area was 8.1 percent according to an initial estimate by the European statistical office Eurostat, and 7.9 percent in Germany according to national calculations.

The ECB is aiming for an inflation target of 2 percent in the medium term.

Some economists believe that inflation in Germany could be slightly lower in June, July and August due to the temporary tax cut on petrol and the cheap 9-euro train ticket.

In view of the very incomplete transfer of the petrol tax cut to consumers, however, this still seems to be very uncertain.

The inflation rate would then rise again in September.

Consequences for savers and borrowers

Consumers are already feeling the effects of the turnaround in interest rates – even if savings interest rates remain significantly lower than inflation and savers with practically all bank deposits make a loss after inflation.

After all, there is "movement in the market" when it comes to consumer interest rates, says Horst Biallo from the consumer platform of the same name.

The first banks are beginning to advertise slightly higher interest rates on fixed deposits, although they are still below inflation.

Interest rates for consumer loans have also risen.

Mortgage rates have even seen one of the fastest rises in history, from less than 1 percent for ten-year mortgage loans at the turn of the year to around 2.8 percent now.

A whole series of banks have announced that they will abolish negative interest rates on current accounts and call money accounts because of the ECB interest rate turnaround.

ING Germany, for example, wants to start with very high allowances at the beginning of July.

Other banks are also increasing their allowances for negative interest so much that only a few customers are affected by these so-called custody fees.

Other banks have announced that they will also end their negative interest rates for customers, at least in parallel with the abolition of the ECB's negative interest rates.

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