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ECB officials back Christine Lagarde on rates and signal further rises

Central bank not close to pausing its cycle of interest rate increases

Christine Lagarde, President of the European Central Bank, indicated more rate hikes are likely after this week's hike. Photograph: Thomas Lohnes/Getty Images

Jana Randow
Fri May 5 2023 - 13:44

European Central Bank officials are rallying behind president Christine Lagarde’s declaration that there’s still some way to go before interest rates reach their peak.

Economists and traders had pared bets in the run-up to Thursday’s policy meeting on concern that US banking turmoil would spill over into Europe and curtail the ECB’s hiking cycle.

But while policymakers slowed their tightening pace to a quarter-point, Ms Lagarde indicated she still anticipates at least two more hikes.

“Rates must be raised as long as we can be reasonably sure that price increases will be slowing steadily to close to 2 per cent over a reasonable period of time,” ECB governing council member Madis Muller said on Friday in a blog post. “In light of what we know now, this means that yesterday’s rate-hike decision will not be the last.”

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His colleagues – François Villeroy de Galhau from France and Gediminas Simkus from Lithuania – offered similar views, both signalling support for this week’s 25 basis-point move and arguing that the fight with inflation isn’t over.

Friday’s comments underpin Ms Lagarde’s claim that the ECB’s latest decision received “almost unanimous support”, even though she reported some officials would have preferred a bigger, half-point move.

Those more hawkishly-minded governing council members didn’t put up much of a fight, though, according to people familiar with the matter. Signalling more tightening and announcing an end to reinvestments under the ECB’s asset purchase programme helped secure an agreement, they said.

Most economists, including those at Goldman Sachs and Morgan Stanley, are following Ms Lagarde’s lead and now predict two more hikes. ING and Commerzbank are among those expecting only one, while Danske Bank sees the ECB lifting its deposit rate all the way to 4 per cent from 3.25 per cent currently.

“We have slowed down not because our determination to beat inflation is diminished,” Mr Villeroy de Galhau said in an interview with Radio Classique. “We are committed to bring inflation toward 2 per cent by 2025 and maybe even by the end of 2024.”

Professional forecasters surveyed by the ECB would argue such expectations are a bit of a stretch. While they slightly lowered their outlook for this year and next, they see price pressures at 2.2 per cent in 2025 and at 2.1 per cent in the longer term.

The ECB’s latest projections from March see inflation reaching 2 per cent in the second half of 2025. Exactly what course they plot will be determined by readings on output, prices and banks, according to Slovenia’s Bostjan Vasle.

“As before, further steps will depend on the current situation at the time, especially on economic and financial data, the movement of core inflation and the effectiveness of our measures,” he said in a statement. – Bloomberg

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