European Central Bank may raise interest rates in July

Flags of Estonia and the European Union.
Flags of Estonia and the European Union. Source: Siim Lõvi /ERR

The European Central Bank may raise interest rates as early as July, not at the end of the year as expected, due to rapidly rising inflation, the head of the Bank of Estonia believes.

"In recent months, however, the trend has clearly been that the rise in prices, as in Estonia and in the euro area as a whole, has been higher than for some time. /.../ What this means for the central bank, of course, is that it is our job to respond to rising prices," Chairman of the Bank of Estonia Madis Müller said on Tuesday.

This is likely to mean interest rates are raised earlier than previously estimated, he said.

In mid-April, the European Central Bank agreed additional bond purchases would end during the third quarter, ETV's "Aktuaalne kaamera" reported on Tuesday. Müller thinks interest rates may start to rise immediately after this.

"It seems to me, that in light of the news of the latest price increase, it would be appropriate to do so at the beginning of the third quarter, perhaps already in July," he said.

Müller said the European Central Bank will decide on the increase.

Peter Priisalm, investment manager of the asset management company Avaron, said many analysts believe the European Central Bank is late with its interest rate changes.

He said one of the best ways to lower prices is high prices. This is because as consumption falls it brings prices down and inflation falls.

"And so the question is whether it makes sense to raise interest rates now, because they may start to depress demand in a situation where it is no longer necessary to limit it," Priisalm said.

The changes imposed by the European Central Bank will also affect commercial banks and credit issued by them. Due to this, the six-month Euribor, which is currently negative and underlies most loans in Estonia, could rise to 0.5 percent in the autumn.

In January, experts said it may rise above zero and become positive in 2023, but it actually did so last month for the first time in six years.

Luminori 's chief economist Lenno Uusküla believes it could reach 0.5 percent in the autumn.

Last month, Estonia had the highest Eurozone annual inflation at 19 percent.


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Editor: Helen Wright

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