ECB does not want to raise rates too late this time

Christine Lagarde announced yesterday that she will remain on as ECB president for now and will serve out her term until October 2027. If dark clouds hang over the economy, the captain cannot leave the ship, that is her motivation. Due to the war in the Middle East, inflationary pressure is increasing again and the ECB is therefore strongly focused on interest rate hikes, although this is still not a foregone conclusion. There was speculation about the ECB president stepping down early, but she has now personally dispelled those rumours. The 70-year-old Lagarde has been in office since November 2019 and will remain there for the coming years too, if it is up to her. Lagarde has no need for distraction. The big question now on the table in Frankfurt is whether the ECB should raise rates in the coming months. At the start of this year that seemed not to be the case, but the war in Iran has changed the picture. Due to rapidly rising energy prices, inflation could rise further. Inflation is rising In her home country France, inflation came in at 1.7% last month. This is admittedly acceptable compared with the European target of 2%, but it is a clear increase. In January there was still slight deflation. The preliminary estimate from CBS shows that in the Netherlands inflation had risen to 2.7% in March, compared with 2.4% a month earlier. That means the increase in the price level is slightly above the eurozone average, which preliminarily came in at 2.5% in March. Energy was the main driver. Prices in other categories may also rise in the coming months because companies pass on the high energy prices. At the same time, this could also be a reason for the ECB not to raise rates, in order not to slow the economy down further. A higher rate could also strengthen the euro further, which has already risen sharply in recent weeks. Do not react too late The ECB's next interest rate decision is on the last day of this month. At the end of last month Lagarde already said that a rate hike could be justified if inflation remains just above the European target. She said this week in an interview with Bloomberg that she wants to safeguard the 2% target firmly. During the outbreak of the war in Ukraine, more than four years ago, inflation in the eurozone also rose quickly. At the time, the ECB was criticised for not raising rates in time. It seems she is implicitly saying that she does not want to make that 'mistake' a second time. Still, many economists do not think the main interest rate will already rise in April, especially because energy prices are falling again now that there is a – admittedly fragile – ceasefire. The ceasefire expires early next week. After failed negotiations between the US and Iran last weekend, both countries will make another attempt in the coming days to settle the conflict. Oil price down again, Euribor continues to rise Meanwhile, unrest on the financial markets continues, although the oil price today has fallen back below $95 per barrel, the lowest level in a month. The three-month Euribor, on the other hand, is continuing to rise for now and is now trading above 2.2%, the highest level since May last year. Variable-rate contracts for financing and leasing are often directly linked to this, so users notice the effects quickly. Euribor is often seen as a market indicator of the expected direction of the ECB rate, which currently stands at 2.15% for refinancing. For the first time in years, Euribor is above that again. Long-term rates for five and ten years are easing again after a peak at the end of March, although the movements are volatile. After a period of falling and stable interest rates, it is clear that the war in the Middle East has once again brought uncertainty into the interest rate path, without it being clear whether and when the ECB will actually intervene.