ECB could raise interest rates sooner than expected

The European Central Bank (ECB) could be prompted to raise interest rates sooner than planned against a backdrop of inflation and divergent monetary policy, according to Allianz's Chief Economic Advisor, Mohamed El-Erian.

"It wouldn't surprise me if they (the ECB) start hiking in the middle of summer (2019), as opposed to the end of the summer, or even the beginning of the summer. But they're going to retain optionality 'til the very last moment," El-Erian told.

El-Erian, a prominent economist and one-time CEO and co-CIO of bond giant PIMCO, said the interest rate policies of central banks were diverging quickly. The Federal Reserve has already embarked on rate hikes amid robust U.S. economic growth while the euro zone's central bank, the ECB, is approaching rate hikes with caution. It has yet to increase rates with the 19-country euro zone still showing signs of regional weakness, and vulnerable to mounting global trade tensions.

"The interest rate dynamics are completely consistent with divergence in economic policy and divergence in performance," El-Erian said, adding, "The question is, does it (raising rates in one country) break something somewhere else?"

"The ECB, in particular, is going to be put in a tough position because they're dealing with high inflation. And they're going to have to think very seriously as to whether to accelerate their rate hikes."

The ECB has signaled that it will not raise record low interest rates before September 2019, a month before current President Mario Draghi is due to leave his post. In the meantime, headline inflation in the euro zone is expected to be 2.1 percent in September, up from 2 percent in the previous month, and above the bank's target of below (but close to) 2 percent.

Although rising oil prices have been largely seen as the culprit for inflationary

Asked about what approach the ECB might take to normalize its policy and raise interest rates, El-Erian said the central bank would have to be very cautious and might not fully signal its next move.

"I think they'll want to have as much optionality and we're not going to hear anything for a while," he said.

Source: CNBC

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