ECB model assumes lower interest rate peak than the financial market
Washington, Frankfurt According to insiders, a new economic model is being discussed at the ECB that assumes a lower interest rate peak than is currently expected on the financial market. This model analysis by the ECB’s expert staff could play a role as an important input in future discussions, four insiders familiar with the situation told Reuters. The new “Target-Consistent Terminal Rate” model assumes that the ECB only has to raise its deposit rate to 2.25 percent in order to bring inflation back to the central bank’s target of two percent.
The new model calculation is well below the estimate on the financial market for the interest rate on deposits. There it is currently expected that the ECB will raise the rate to just over three percent on its course to increase interest rates. The interest rate on deposits is currently 0.75 percent after two rate hikes by monetary watchdogs. This suggests that ECB staffs may view inflationary pressures as more moderate than stock market investors and even some central bankers. The new model was recently presented at a meeting of monetary authorities in Cyprus, it said.
According to insiders, the calculation was recorded differently. Many monetary watchdogs have criticized some of the basic assumptions. The euro watchdogs would have agreed to take the interest rate listed in the model into account in their considerations. But they would have decided not to use it as a monetary policy forecast, or to use it in official communications. The main objection was that economic models had recently worked rather poorly, the insiders said. Therefore, there would be little confidence in an indicator that is so far below current estimates in the financial market.
An ECB spokesman declined to comment on the information. The ECB was recently accused of having recognized the massive surge in inflation in the euro area too late.
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