The European Central Bank could end its stimulus programme earlier than planned. ECB policymaker Martins Kazaks told that it is unlikely to raise its main interest rate in July. Because the investors are expecting this.
Investors have brought forward their bets on the first ECB rate hike. Mainly this is after ECB President Christine Lagarde opened the door to such a move and acknowledged mounting inflation risks. But Kazaks, who is Latvia’s central bank governor, pushed back against market bets on a July hike. This is because this would imply a complete winding down or tapering of the ECB’s bond purchases. Kazaks stated that July would imply an extremely and unlikely quick pace of tapering. But overall, at the current juncture, naming a specific month would be much premature.
The ECB has long said that it would end its bond purchases shortly before raising its deposit rate from minus 0.5%. Lagarde and colleagues have reaffirmed that commitment in recent days. Asset purchases are currently set to run at least until October. This is although they stated that the ECB is likely to bring that date forward at its March 10 meeting. With euro zone inflation at a record 5.1% in January. This is more than twice the ECB’s 2% goal; Kazaks was also open to action.
The economists said that if they see that inflation remains high and the labour market remains strong. If they see that the economy keeps going, the direction is clear and they may act sooner than they assumed in the past. Also, he added that with the economy recovering, inflation at this level and increased risk of persistency of inflation, new net asset purchases become less necessary. Kazaks said that he favoured laying out a new roadmap. And that is for how bond purchases would be reduced. This would create recurrent cliff effects for the bond market.
Money markets have priced in a 15-basis point hike in the ECB’s deposit rate in July. The ECB’s deposit rate has been below 0%. This means that the banks are charged to park their spare cash at the central bank overnight, since 2014. Dutch central bank governor Klaas Knot said that he expected the first ECB rate rise to come in the fourth quarter of this year. France’s Francois Villeroy de Galhau said that markets shouldn’t rush to conclusions about the timing of any ECB move. This is while Slovakia’s Peter Kazimir said that the ECB will be wiser in March when it has more data.