European Central Bank President Christine Lagarde suggested on Thursday that interest rate hikes will continue beyond March to curb inflation, which also emerges from the minutes of the last monetary policy meeting.
The guardians of the euro have raised rates by 3 percentage points since July in five straight meetings, an unprecedented turn in the face of inflation sailing at levels four times above the medium-term target of 2%.
At this stage, it is possible that we will continue on this path, said Christine Lagarde on the Spanish channel Antena 3.
It did not, however, advance on the extent of the possible increases after the March 16 meeting, the subject of all the speculation on the part of the markets.
Ms. Lagarde found it impossible to say by how much the monetary institute’s key rates should increase further. These decisions will be taken based on the data available at upcoming meetings, she added.
The annual inflation rate in the euro zone fell in February for the fourth month in a row, to 8.5% over one year, after 8.6% in January, according to Eurostat on Thursday, but the drop is less steep than expected in because of high food prices.
Don’t cry victory
At its last meeting in February, the ECB had already estimated that the outlook for inflation was improving, but that it was far too early to declare victory, according to the minutes published on Thursday.
While energy prices have calmed down compared to last year’s surge, the Board of Governors expressed concern over significant wage increases which could fuel inflation for longer rather than curb it.
Similarly, the opening of China after the months of restrictions due to Covid can have two opposite effects: to lower prices in world trade, but also to increase the prices of raw materials such as gas because China will seek to get it in quantity.
These parameters create considerable uncertainty for the evolution of inflation in the euro zone, according to the document.
The guardians of the euro therefore decided in February to send a signal of firmness on the rates to the attention of the markets deemed too optimistic. The latter estimated, wrongly according to the ECB, that the world economy, including the euro zone, was at a point of inflection, with stronger growth and lower inflation than expected.
Investors even concluded that rate cuts would soon be necessary, according to the document.
On the contrary, the minutes of the February meeting underline the determination of the ECB to continue raising interest rates beyond the March meeting, comments Carsten Brzeski, economist at ING.
The benchmark deposit rate is expected to peak at 3.5% in June, from 2.5% currently, with the possibility of the peak being even higher, according to Andrew Kenningham of Capital Economics.
Ms. Lagarde was not more specific on the subject, confining herself to repeating Thursday that credit costs will reach levels that restrict economic activity and will remain there as long as inflation is not guaranteed to return to its target.