The unexpected statement by Lagarde, ECB president, that the bank is likely to raise the deposit rate from the negative territory by the end of September this year and may even raise it even more if inflation does not return to the 2% mark and does not stabilize at this level, led to a sharp increase in the single currency rate - the currency that received an additional stimulus to growth at the opening of trading in Europe today.
Earlier, the European regulator did everything to ignore the beginning of interest rate hikes, reasonably fearing stagflation in the region's economy against the background of galloping inflation, but this fact is still unlikely to be overlooked. Although consumer inflation has slowed down the growth rate somewhat, it remains high and will put pressure on demand and the economy as a whole. It seems that Lagarde's statement, published in a blog on the ECB's website, signals a radical change in sentiment and we really should expect the start of the cycle of interest rate hikes. Recall that at the moment the key interest rate is at zero percent, and the deposit rate is at -0.5%.
So will the ECB manage to reduce inflation or not, and what can prevent it from doing so?
The overall inflation rate reached 7.4%, which is much higher than the benchmark of 2.0%. It is clear that to force inflation to fall to the coveted 2.0%, it is necessary not only to simply raise interest rates but to establish broken supply chains, as well as somehow solve the problem with high energy prices, which Europe itself provoked under the sensitive leadership of the United States to take off.
We have great doubts that the ECB will be able to solve the problem of high energy prices so soon, which are dragging inflation with them. But there is one important problem here of a political, even, one might say, ideological nature - the confrontation with Russia, which is a major supplier of energy resources to Europe.
We believe that the dreams of Lagarde and the European political elite will not be resolved soon, which means that the European economy is facing the real fact of entering a recession, and even against the background of stagflation - this is when rising inflation is accompanied by a cycle of interest rate increases. In this case, a real war will begin in the foreign exchange market between the dollar and the euro in the eurodollar pair, since the start of the rate hike process in the eurozone will inevitably cause a reassessment of the dollar/euro ratio. After Lagarde's statements, the single currency has already reacted with a strong rise against the dollar, which means that in the near future we will see other interesting levels for this major currency pair.
