Hike rates

ECB plans to hike rates after ending bond purchases in Q3: Schnabel

Isabel Schnabel, a member of the German economic expert advisory board, attends the 29th Frankfurt European Banking Congress (EBC) at the old opera house in Frankfurt, Germany November 22, 2019. REUTERS/Ralph Orlowski//File Photo

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CERNOBBIO, Italy, April 2 (Reuters) – The European Central Bank plans to raise interest rates sometime after the end of its bond-buying program in the third quarter of this year, member Isabel Schnabel said on Saturday. of the ECB’s Administrative Council.

The ECB’s head of market operations said net asset purchases would be concluded in the third quarter, as long as data supported the expectation that the medium-term inflation outlook would hold.

“We will raise interest rates some time later, if appropriate, in light of incoming data,” Schnabel said at an event in Cernobbio, northern Italy.

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Annual consumer price growth hit 7.5% in March, the highest value on record, as Russia’s war in Ukraine drives up food and fuel prices, impoverishing Western consumers. Read more

“The speed of normalization … will depend on the economic fallout from the war, the severity of the inflationary shock and its persistence,” Schnabel said.

The acceleration in price growth leaves the ECB and the central banks of other major economies with a sharp political dilemma.

Inflation alone would justify monetary tightening, especially since record high unemployment portends rising wages, a prerequisite for sustained inflation.

But tighter policies could now drag down an economy that is already close to stagnation as the war in Ukraine saps consumer purchasing power and depresses business investment.

Still, Schnabel said inflation risk was skewed towards even higher readings given the sharp rise in producer prices, structural economic changes like deglobalization and likely wage hikes.

The ECB’s mandate is price stability, so it should prioritize that in the face of high inflation, while governments could support economic growth with targeted fiscal measures, avoiding overly expansionary policies that would complicate the task. from the bank, she said.

“A central bank that is seen as committed to protecting its mandate can contain inflation at little economic cost,” by lowering inflation expectations, she said.

The ECB will then meet on April 14. At its last meeting, it decided to end bond purchases in the third quarter but made no further policy commitments, arguing that policy must remain flexible.

The US Federal Reserve and the Bank of England have begun monetary tightening.

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Reporting by Sarah Marsh in Berlin and Francesco Zecchini in Cernobbio, Italy, editing by Clelia Oziel

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