ECB has ‘extra space’ before first rate hike, Lagarde says

FRANKFURT, March 17 (Reuters) – The European Central Bank has given itself “extra space” between the planned end of its money-printing programme this summer and the first interest rate hike in more than a decade, ECB President Christine Lagarde said on Thursday.

Investors were ramping up their bets on higher ECB rates after the Federal Reserve raised the cost of borrowing late on Wednesday, tightening its stance for the first time since the start of the coronavirus pandemic and despite uncertainty stemming from Russia’s invasion of Ukraine. 

Central banks worldwide have been caught on the hop by a surge in inflation, which hit 5.9% in the 19-nation euro zone last month after spending most of the last decade below the ECB’s 2% target.

But, in a repeat of last week’s message, Lagarde said that any increase in the ECB’s policy rate will be gradual and come only “some time” after its bond-buying programme, which should happen in the third quarter of the year barring more financial turmoil.

“This maintains our traditional sequencing logic, but also gives us extra space if needed after we stop purchasing bonds and before we take the next step towards normalisation,” she told a conference in Frankfurt.

Money markets were pricing in increases worth nearly 50 basis points to the ECB’s deposit rate by the end of this year, which would take it back to zero after eight years in negative territory.

Lagarde added that the ECB could devise new tools to ensure monetary policy reaches all corners of the euro zone even as it winds down its bond purchases.

These have helped cap the spread between the borrowing costs paid by top-rated Germany and those of indebted countries like Italy and Greece.

“If necessary, we can design and deploy new instruments to secure monetary policy transmission as we move along the path of policy normalisation, as we have shown on many occasions in the past,” Lagarde said.

 In another development, the economic fallout from the war in Ukraine at this stage does not justify a return to “whatever it takes” style policies, French central bank chief Francois Villeroy de Galhau said on Thursday, after the French government presented an emergency plan to help businesses through the current crisis.

Wednesday’s measures were effective in that they address a temporary surge in energy prices, Villeroy, who is also a policymaker at the ECB’s Governing Council, told France 2 television.