ECB economists see interest rates rising below market expectations – monetary policy

Technicians of the European Central Bank (ECB) point out the need to increase the rate applied to deposits to 2.25%, or even less than this level, if the monetary authority simultaneously reduces the balance sheet, according to sources close to the process, cited. by Reuters.

The value is much lower than the market bet, which was aimed at the possibility of a key interest rate of 3%.

Economists presented the model during a monetary authority meeting held last week in Cyprus, according to information provided by the British agency.

In less than two months, the rate applied to deposits in the eurozone has moved from negative territory (-0.5%) to 0.75%, a pace never seen before. In early September, the monetary authority led by Christine Lagarde announced a historic rise of 75 basis points in the three key interest rates, in line with market expectations.

Currently, the interest rate applicable to the main refinancing operations is set at 1.25%, while the rate applied to the marginal lending facility is 1.5% and on deposits at 0.75%.

During the last meeting, the Board of Directors also ensured that it would “continue to fully reinvest amounts up to maturity within the scope of the normal asset purchase program” for an extended period of time “and” as long as necessary to maintain conditions with ample liquidity. “The monetary authority will meet again on October 27.

The study, cited by Reuters, notes that interest rates only need to rise once for restricted ground in order to push inflation toward the 2% target.

After reading the study and listening to its presentation, the sources contacted by the British agency informed that the members of the board of directors responsible for voting on the monetary policy of the central bank decided not to disclose the document to the media, or to adopt it in the form. of political orientation.

Among the main reasons for this decision is the fact that this type of model has “performed poorly in recent years” and also the question that ECB economists “underestimate inflation risks,” according to Reuters.

Furthermore, some board members have further argued that their decisions should not be limited to just one model, but rather should take into account a complex set of indicators and factors.

The Belgian governor admits that the “tax applicable to deposits may be as high as 3%”

Pierre Wench, Governor of the National Bank of Belgium, goes further and believes that the deposit rate could even reach 3% to have an anti-inflation effect.

Although the European Central Bank set this key rate at 0.75%, the governor noted that in real terms – the rate for inflation – it remains negative. “Given the current scenario, which is somewhat of a technical recession, we will have to enter the positive territory,” said Pierre Winch. Thus, for portfolios, the rate applied to deposits “may reach” more than 2% by the end of the year.

“I wouldn’t be surprised if we had to go above 3% at some point,” Winch added during the annual meeting of the International Monetary Fund and the World Bank in Washington, DC.