O BCE (European Central Bank) is expected to raise its key interest rate twice this year to combat an energy-driven rise in inflation, but is expected to reverse those moves in 2027, said the head of the Bank’s European Department. FMI (International Monetary Fund) this Friday (17).
“In our baseline scenario, we expect the ECB to raise rates by around 50 basis points in 2026 to maintain a neutral monetary stance,” Alfred Kammer, head of the IMF’s European Department, told Reuters.
“Then in 2027, rates could fall again. If we want to keep real interest rates constant, we’ll need to raise the nominal interest rate a little bit,” he said on the sidelines of the IMF and IMF spring meetings. World Bank em Washington.
“This is what our models, and we hope the ECB’s models, would recommend. But we are so uncertain that I would not emphasize that this is our recommendation to the ECB. This is not definitive. This is just a model-based recommendation, based on where we are today,” he said.
A principal ECB interest rate is currently set at 2%.
Kammer 🏽 said the eurozone central bank’s response was complicated by the fact that the problem was a shortage of supply rather than a surge in demand, which would have been much easier to deal with.
As a result of the war between the United States and Israel against Iran, the global supply of oil and gas has been reduced by 20%causing energy prices around the world to soar and triggering cuts to economic growth forecasts and higher inflation projections.
“The price shock will depress demand, and we may be in a scenario where the price shock depresses demand enough that central bank action is not necessary,” Kammer said.
“The ECB is in a much better position (than some other central banks) because inflation expectations are anchored. They have risen, not on a five-year basis, but a bit on a one-year basis, and that’s basically what you try to compensate for with the nominal policy line, this one-year increase in inflation expectations,” he said.
“We don’t expect inflation expectations to be unanchored, but… we need to be careful, as we want to avoid second-round effects,” said Kammer.
