The European Central Bank is likely to raise its key interest rate out of negative territory by the end of September and could lift it further, ECB President Christine Lagarde said on Monday.
“Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter,” according to Lagarde’s blog post published on the ECB’s website.
The US dollar slumped against the euro Monday on the prospect of a rate hike in the eurozone as a result of European Central Bank President Christine Lagarde’s comment.
Earlier this month, the two currencies were nearing parity for the first time in 20 years. With Lagarde’s comment, the euro exchange rate in dollars hit an intraday high of $1.0692, up more than 1% and its strongest level since April 26.
“Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter,” Lagarde wrote in a blog post on the ECB’s website.
Under negative interest rates, banks are charged a fee to hold their reserves at central banks. The action is aimed at spurring economic growth by pushing banks to lend and consumers to spend with money borrowed at ultra-low rates. The ECB launched negative interest rates in June 2014 to bolster the flagging eurozone economy and reduce the risks of the bloc spiraling into deflation. The ECB’s deposit rate stood at -0.5%.
“The region’s inflation outlook has “shifted notably upwards” compared with the period before the COVID-19 outbreak, making it appropriate for the central bank to begin normalizing monetary policy,” Lagarde was quoted as commenting.
Eurostat has said inflation in the euro area was set to hit 7.5% in April, the strongest rate on record, driven largely by a 38% surge in energy costs.
“I expect net purchases under the [asset purchase program] to end very early in the third quarter. This would allow us a rate lift-off at our meeting in July, in line with our forward guidance,” Lagarde wrote.