Interest rates may rise to all-time highs in Europe

The European Central Bank (ECB), seen as one of the world’s most dovish central banks during the eight-year period of negative interest rates, is expected to continue raising interest rates this year. While the ECB continues to fail recently, investors are predicting that the bank could push interest rates to an all-time high.

Markets are pricing in the ECB raising the deposit rate to 3.75 percent from the current 2.5 percent for September. This rate coincides with the peak of 2001, when the ECB just introduced the euro and tried to increase its value.

The yield on two-year German bonds, which are highly sensitive to changes in interest rate expectations, hit a 14-year high of 2.95 percent on Tuesday, while expectations that the ECB will increase interest rates contradicts the US and UK, which are believed to be near the end of their interest rate cycles.

MAY BE CLOSER TO 4 PERCENT

“It’s really surprising that the ECB seems to be the most aggressive of the major central banks right now,” said Sandra Phlippen, chief economist at Dutch bank ABN Amro. Last week, Goldman Sachs, Barclays and Berenberg also voiced their projections that the ECB could raise interest rates by as much as 3.5 percent.

Frederik Ducrozet, director of Pictet Wealth Management Research, predicted that ECB rates will top out at 3.5 percent. Ducrozet said the bank could remain in tightening mode until September, which could move the ECB closer to a 4% deposit rate.

EXPLANATION OF LAGARDE’S ‘UPS SALE’

ECB chief Christine Lagarde said yesterday that the bank is “watching rates and negotiated fees very closely.” “At this point, we don’t see an inflation-wage spiral for the entire Eurozone. If we had witnessed this, the situation would have been very difficult,” she said.

Although it is feared that the additional costs for companies due to the sharp increase in wages will be passed on to consumers, experts believe that this situation could put permanent pressure on prices.

While the consumer price index (CPI) in the euro zone fell 0.4 percent a month in January, it rose 8.5 percent a year.