Christine Lagarde, the president of the European Central Bank, said on Tuesday that the central bank is at a turning point with its monetary policy, but that there was no need for it to rush to raise rates or withdraw economic support. The euro hit a one-month high against the dollar.
The bloc has been hard-hit by steep rises in the regional price of key fuels such as natural gas and coal, which have soared by 140% and 21% so far this year, respectively, as it seeks to wean itself off Russian energy imports.
We have been going through eight years of negative interest rates, and now we are at a turning point, according to Lagarde.
She said that they were not in a panic mode and that they would stop net asset purchases in July.
The euro rose to a new one-month high against the dollar after Lagarde commented. It gained 3% in the last week as expectations grew for the European Central Bank to act to tackle inflation.
The euro zone rates have been below 0 since the year 2014, and the euro zone central bank hasn't raised them in a decade.
In a Monday post, Lagarde said the time had come for the central bank to start adjusting monetary policy. In April, the inflation rate was 7.5%, up from 5.9% in February. The figure is four times higher than the target of 2%.
She said in the post that they are likely to exit negative interest rates by the end of the third quarter.
Banks are charged a fee to hold their reserves at central banks when the deposit rate is less than 1%. Incentivizing banks to lend and consumers to spend with borrowed funds at very low rates is the aim of the move.
As the world has bounced back from the swine flu and the war in Ukraine, central banks are rushing to contain inflation before it hurts the economy. The Federal Reserve is expected to raise US interest rates to 2.5% by the end of the year.
The Fed has been slow to curb inflation in the US and many economists think it is.
Lagarde said in a Monday post that the European Central Bank is perfectly on time and not behind the curve, unlike the United States.
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