Eurozone could move away from negative rates at the turn of the year

(Bloomberg) — The European Central Bank could end eight years of negative interest rates by the end of 2022 or early 2023 as it intensifies efforts to curb record inflation in the eurozone, according to Governing Council member Bostjan Vasle.

Now that Russia's war in Ukraine is inflating prices that were already rising and in the face of signs of increased pressure on wages, policymakers must be “very careful” to act before further price pressures materialize, the head of the Slovenian central bank said in an interview.

He agreed with a suggestion last week by Klaas Knot, another member of the Governing Council, that net asset purchases — expected to end in the third quarter — could be halted in July.

“The most important thing for me is that we will start this process not too late in the year and we will have the opportunity to be out of negative territory by the turn of the year,” Vasle, who is among the ECB's hardline voices, said Monday.

“We still expect fairly strong positive growth rates, and if that scenario materializes, I see no reason why we would not continue to normalize politics after the turn of the year and would go above zero with interest rates,” he said.

Following the comments, the money markets held their bets on two-quarter-point increases by the end of the year and four such increases by March 2023.

The ECB adopted negative rates in 2014 as it sought to revive inflation that had fallen amid Europe's debt crisis. But now he has the opposite problem: price increases more than triple the 2% target, and high energy costs are rising even more after Russia's invasion of Ukraine.

Vasle sees no need to accelerate that process further, saying that the current schedule is flexible enough and “we don't want to eliminate the necessary support for the economy.” But, after hyperinflation following the collapse of Yugoslavia, he is keenly aware of price risks and advocates a normalization of monetary policy “slightly faster” than some of his colleagues.

Despite the fact that consumer prices rose by 7.5% from the previous year in March, the ECB's benchmark forecast for 2022 of 5.1% “is still quite realistic,” according to Vasle.

“My expectation is that in a quarter or two we will see inflation peak and then a gradual decline by the end of the year,” he said. “The last reading of inflation was indeed very high, but in the context of the conflict and rising prices in various energy segments, it was not so unexpected.”

Original Note:

ECB's Vasle Says Negative Rates May End by Turn of the Year (1)

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.