(Bloomberg) — 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.
(Bloomberg) — 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 runup 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, 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% over a reasonable period of time,” Governing Council member Madis Muller said 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.”
His colleagues — Francois Villeroy de Galhau from France and Gediminas Simkus from Lithuania — offered similar views, both signaling support for this week’s 25 basis-point move and arguing that the fight with inflation isn’t over.
Friday’s comments underpin 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. Signaling more tightening and announcing an end to reinvestments under the ECB’s Asset Purchase Program helped secure an agreement, they said.
Most economists, including those at Goldman Sachs and Morgan Stanley, are following 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% from 3.25% currently.
What Bloomberg Economics Says
“Bloomberg Economics thinks this cycle has only one more increase to go — another 25 basis points in June — but the risks are skewed toward an additional move of the same size in July.”
—David Powell, senior euro-area economist. Click here to read more
“We have slowed down not because our determination to beat inflation is diminished,” Villeroy said in an interview with Radio Classique. “We are committed to bring inflation toward 2% 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% in 2025 and at 2.1% in the longer term.
The ECB’s latest projections from March see inflation reaching 2% 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 press release.
–With assistance from Ott Tammik, Jan Bratanic and Craig Stirling.
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