With the outbreak of the Ukraine war, the inflationary pressure increased and spread, explained chief economist Thomas Gitzel from VP Bank: “Measured against this, an interest rate hike in July is a must. We hope that the monetary watchdogs will fulfill this obligation.” The financial markets are expecting three to four interest rate increases this year. The key monetary policy rate is currently 0.0 percent.
pressure to act increases
At the same time, banks have to pay penalty interest if they hoard excess funds at the central bank. This so-called deposit rate is currently minus 0.5 percent. Should the European Central Bank (ECB) get serious about raising interest rates, the deposit rate could return to positive territory for the first time since 2014. The era of penalty interest would thus be a thing of the past.
KfW chief economist Fritzi Köhler-Geib sees a challenge for the ECB: if it tolerates inflation rates above its two percent target for too long, the likelihood of a wage-price spiral increasing. “Hardening inflation again in such a situation would then be a much more difficult and costly undertaking,” warned the economist.
The pressure on the monetary watchdogs to act the more the inflation rate moves away from the ECB’s target of 2.0 percent. “It looks a bit like an inflation peak, but given the global situation this is highly uncertain. The persistently high inflation rate should keep the ECB going,” says chief economist Alexander Krüger from the private bank Hauck Aufhäuser Lampe.