ECB will continue with its economic stimulus policy

The negative interest rate stimulus policy of the ECB will be withdrawn gradually and when the conditions of the Eurozone economy allow it

ECB President Christine Lagarde recently pointed out that raising interest rates too quickly would stifle the Eurozone’s recovery. “Raising the main interest rate of the European Central Bank now would not reduce the historically high levels of inflation in the Eurozone and would only harm its economy.”

Lagarde stressed that the ECB will only withdraw its aggressive negative interest rate stimulus policy gradually and when conditions allow it because that would not solve any of the current economic problems, on the contrary, from his point of view, that could exacerbate the economic situation.

“That would not solve any of the current problems (…) On the contrary: if we act too hastily now, the recovery of our economies could be considerably weaker and employment would be put in danger. (…) Now we can adjust, calmly, step by step, our monetary policy instruments (…) and when the economic data allows it, we will do it”, the president of the ECB insisted.

Bond market in fall

Lagarde’s statements have had a significant impact on the financial market, specifically on the bond market, which plummeted “by opening the door to the ECB’s first rate hike in more than a decade, given the persistent upward pressure on prices.

Money markets were expecting a 50 basis point hike in the ECB’s deposit rate last December, but Lagarde is now signaling that a hike would not end high oil prices and supply problems that have fueled inflation.

The euro zone registered an inflation of the order of 5.1 % and the European Commission indicated that it estimates an inflation for this year of 3.5 %, well above 2 % established as a target by the ECB.

The European financial entity had declared in December that it would continue buying bonds to stimulate the decline in inflation at least until October this year and will only raise rates once these purchases are completed. However, it is very likely that it will change the line in March when its next monetary policy meeting takes place.

Currently its ECB interest rate on bank deposits stands at -0.5 %. ECB Chief Economist Philip Lane, who is responsible for monetary policy proposals, has been more cautious, saying the current situation does not warrant significant tightening.

M. Rodriguez


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