Europe's central bank considers interest rate rise

Markets in Europe are bracing for the possibility that the European Central Bank will raise interest rates for the first time in a decade as soon as July.

The Federal Reserve in the United States raised its key interest rate by a quarter of a percentage point last month from close to zero, and is expected to announce a half-point rate rise at its policy meeting next week, reported the Financial Times.

The US Federal Reserve is the world's biggest central bank, and its decisions impact market behavior globally.

Christine Lagarde, president of Europe's central bank, or the ECB, has been assuring investors it will take a more "gradual" approach than the US Federal Reserve to tackle surging inflation.

Lagarde told US news station CBS on Sunday that the Russia-Ukraine conflict has left Europe "more exposed" to soaring energy costs because of the region's greater reliance on Russian oil and gas imports.

She noted that higher energy prices account for half of eurozone inflation, much more than in the US, adding: "If I raise interest rates today, it is not going to bring the price of energy down."

Lagarde said the timing of ECB tightening would be "data-dependent" and policy would adjust in "a sufficiently well sequenced, well calibrated, and－for us in Europe－a gradual way, so that we don't induce recession".

Investors expect the ECB to raise its deposit rate from minus 0.5 percent by the end of this year, and to above 1 percent next year, after inflation in the eurozone increased by a record 7.5 percent in the year to March, Reuters reported.

One of the ECB's 25 policymakers, Martins Kazaks, told Reuters that interest rates could rise soon and that there is scope for up to three hikes this year.

"A rate rise in July is possible and reasonable," said Kazaks, who is Latvia's central bank governor. "Markets are pricing two or three 25 basis point steps by the end of the year. I have no reason to object to this, it's quite a reasonable view to take.

"Whether it happens in July or September is not dramatically different, but I think July would be a better option," he said.

He added that interest rates should eventually rise to a neutral level, where the central bank is neither stimulating nor holding back growth. He said this would likely be from 1 to 1.5 percent.

In a news briefing earlier this month, the ECB said that how Europe's economy develops depends on how the Russia-Ukraine conflict evolves, and "on the impact of current sanctions and on possible further measures".