ECB ‘not pausing’ rate hikes despite slowing pace, says Lagarde

The European Central Bank (ECB) is “not pausing” its current cycle of interest rate increases as the outlook for price inflation across the 20 country single currency area remains “too high for too long”, Christine Lagarde said on Thursday.

Speaking at a press conference after the ECB’s governing council opted to increase rates by 0.25 per cent – its smallest single increase since Frankfurt began hiking rates last July – Ms Lagarde also hinted that further increases could be on the way.

[ Interest rate rises: Are you one of the borrowers being hammered? ]

“We have more ground to cover and we are not pausing. That’s extremely clear,” the ECB president said, outlining a number of “significant” upside risks to the central bank’s medium term inflation outlook.

“These include existing pipeline pressures that could send retail prices higher than expected in the near term,” she said. “Recent negotiated wage agreements have added to the upside risks to inflation, especially if profit margins remain high.”

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She said, however, that “lower energy prices, the easing of supply bottlenecks and fiscal policy support for firms and households have contributed to the resilience of the economy” and pushed core inflation – which strips out volatile food and energy prices – down core to 7.3 per cent in April from 7.5 in March, according to data published on Tuesday. Meanwhile, she said that private demand – from both households and firms – “especially consumption, is likely to have remained weak”.

Ms Lagarde also highlighted evidence that interest rates have entered “restrictive territory” with European bank lending volumes having retreated more sharply than expected, according to ECB data published this week. “Our latest bank lending survey reported a tightening of overall credit standards, which was stronger than banks had expected in the previous round and suggest that lending may weaken further,” she said. Ms Lagarde added, however, that the “strength of transmission” of tighter monetary policy to the real economy remains “uncertain”.

The ECB is still working off a baseline assumption, set out in March, that headline inflation will decline to around 2.8 per cent in the fourth quarter of 2023 before hovering around 3 per cent next year, Ms Lagarde said. The annual headline inflation rate is not currently expected to return to the ECB’s target of 2 per cent until the third quarter of 2025.

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Thursday’s rate hike, the latest in a string of seven consecutive increases, will see annual repayments for thousands of tracker mortgage holders climb further.

While recognising that many families are “hurting” as a consequence of the current rates cycle, Ms Lagarde said: “This is, unfortunately, not something that we can alleviate or attenuate because our task is to reduce inflation and the tools that work in that respect is the interest rates. And we have to use the interest rates.”

She said that some countries are considering “particular steps” to lessen the burden on these borrowers and that “some financial institutions are also looking at offering moratorium or delay”. She added, however: “I think the best we can do is tame inflation in a timely manner – meaning as fast as we can – in order to then facilitate a return to different interest rates that would not be as high in the future.”

Speaking on Wednesday, Minister for Housing, Darragh O’Brien, hinted that help for mortgage holders could be forthcoming in October’s budget. He said the Minister for Finance, Michael McGrath, set out the Government’s view on the ECB last week suggesting it would “have to take into account the effect that the interest rate increases are having on normal people out there”.