Christine Lagarde has spent several days persuading investors the European Central Bank will take a more “gradual” approach than the Federal Reserve to stamp out soaring inflation.
However, her insistence that the eurozone economy is not yet as strong as the US has not stopped markets pricing in the possibility of the ECB raising rates for the first time in a decade as soon as July.
Such a shift, which analysts at Goldman Sachs and JPMorgan Chase are now forecasting, would mark a turnaround for the ECB and its president, who was insisting as recently as December that it was “very unlikely” to raise rates at all in 2022.
Markets now bet the ECB will take its deposit rate from minus 0.5 per cent into positive territory by the end of this year and to above 1 per cent next year.
Even so, the ECB will still lag far behind the Fed, which last month raised rates by a quarter of a percentage point from close to zero and is expected to announce a half-point rate rise at its policy meeting next week.
Jay Powell, Fed chair, has hinted at a string of half-point rises to swiftly bring rates to a “neutral” level that no longer actively stimulates demand. Analysts put the neutral rate at between 2.25 and 2.5 per cent.
The Fed will also begin shrinking its $9tn balance sheet as early as June — something the ECB is not planning to do before the end of 2024 at the earliest.
At first glance, the ECB seems to have almost as big an inflation problem as the Fed. Eurozone consumer prices rose by a record 7.4 per cent in the year to March — nearly as far above the 2 per cent level targeted by most central banks as the 8.5 per cent rise reported by the US. Source: FT