ECB warns investors of higher interest rates: What are the risks?

The European Central Bank, ECB warns investors of higher interest rates. The bank also warned governments, the ECB asked them to take precautions. Will the current monetary policy stance of the ECB remain intact?

4 April, AtoZForex  After the US interest rate hike last month, now the European Central Bank (ECB) is also looking forward to raise its interest rates. The central bank warns investors and financial sectors to get ready for higher interest rates after years of record lows. We informed’s readers last month that policy makers expect ECB can raise interest rates before its quantitative easing (QE) ends.

Why does the ECB warns investors of higher interest rates?

The European Central Bank signals the euro zone governments and the investors to be prepared for higher interest rates. Benoit Coeure, the ECB Executive Board member, said on Monday that a looming adjustment to the bank’s monetary policy is transparent. During a finance conference in Paris, Coeure told attendees:

“It’s obvious that the financial sector and other economic actors and especially governments must prepare (for higher rates).”

Furthermore, Coeure commented that the negative interest rates had been effective in terms of monetary policies. He instead signals that these rates may not stay in place too long. This remark came from Coeure because such rates could weaken the banks that deposit with ECB. Coeure reiterated: “I hope that euro zone governments know that interest rates will not stay at current levels.”

The latest increase in the German and French debt has been listed on scarcity in the market. Considerably, this seems to aggravate by the central bank’s continuous buying. However, as per Coeure, it is not evident that the ECB’s stimulus policy is negatively affecting the market activity. He added:

“So far we see no evidence that the current constellation of interest rates bears risks or the smooth function of markets, nor to financial stability or the transmission of our policy.”

Will ECB current monetary policy stance remain appropriate?

Another ECB board member and the bank’s chief economist, Peter Praet, in an interview published on the central bank’s website on Monday said that the ECB was getting more hopeful on the economic outlook for EU. Peter Praet said:

“Incoming data are making us more confident that the economic expansion will continue to firm and broaden. But the important question is whether the adjustment of the path of inflation towards below, but close to, 2% would continue without our expansionary monetary policy.”

Praet added that the ECB’s current monetary policy stance remains appropriate.

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