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

FRANKFURT (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. [GVD/EUR]

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.

The ECB has said it needs to be confident that inflation in the euro zone, including core measures that exclude volatile components such as energy and food prices, stabilises at 2% before raising rates.

Speaking after Lagarde, the ECB’s chief economist Philip Lane said core inflation, which came in at 2.9% in February, would likely fade over time as fuel costs level off.

Lane estimated that around 80 basis points of core or underlying inflation was purely down to the energy price shock.

He added that market-based expectations of long-term inflation, which hit 2.3% earlier this week, were actually still below the ECB’s goal once the risk premium – or compensation demanded by investors at times of uncertainty – was taken out.

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.

(Reporting By Francesco Canepa; Editing by Mark Heinrich and Raissa Kasolowsky)