There was an idea that the European Central Bank (ECB) would pause the process of monetary tightening after the expected May rate hike. Having raised interest rates by the most in its 25-year history and with the euro zone economy barely growing and banks turning off the credit taps, a hiatus might have seemed natural.
But with inflation across the bloc still stubbornly high – it rose to 7 per cent in April – Frankfurt officials are not of the mind to let up just yet.
“We are not pausing – that is very clear,” ECB president Christine Lagarde said after last week’s rate hike. “We know that we have more ground to cover.”
Lagarde said interest rates were not yet “sufficiently restrictive” to get inflation down to the ECB’s 2 per cent target and made reference to future “policy decisions”. The latter was interpreted as suggestive of more than one additional rate rise to come.
[ The Irish Times view on rising interest rates: time for a pauseOpens in new window ]
“We continue to expect the ECB to hike rates by 25 bps [basis points] in June, bringing the deposit rate to a peak of 3.5 per cent, with risks of a final 25 bps hike in July depending on future developments in the US banking system,” Frederik Ducrozet at Pictet Wealth Management said.
The ECB fears that recent wage deals and higher-than-expected corporate profits could keep upward pressure on inflation, hence the sterner sounding language. The second-round impacts of inflation are difficult to predict.
Lagarde also dismissed the notion that the ECB would have to pause if its US counterpart did so, saying the ECB was “not Fed-dependent”.
Frankfurt was badly caught out at the start of this inflationary crisis – believing it would be transitory – and it is determined not to underestimate price growth this time around.
Markets now see the terminal rate – for the ECB deposit rate which is now at 3.25 per cent – at about 3.65 per cent, indicating that at least one more hike is fully priced in. Opinion is divided for now on whether we’ll see two more increases.
