The European Central Bank probably won’t be able to declare the end of its historic cycle of interest-rate increases anytime soon, according to President Christine Lagarde.
(Bloomberg) — The European Central Bank probably won’t be able to declare the end of its historic cycle of interest-rate increases anytime soon, according to President Christine Lagarde.
Signaling that officials in Frankfurt will retain a bias toward monetary tightening even if they pause their hiking campaign in the coming months, Lagarde also reiterated that July will bring a ninth straight boost to borrowing costs to bring down inflation.
“It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached,” Lagarde said Tuesday in a speech to kick off the ECB’s annual retreat in Sintra, Portugal. “Barring a material change to the outlook, we will continue to increase rates in July.”
The final stages of the ECB’s rate push are the focus as headline inflation fades but underlying price pressures prove stubborn. A majority of economists sees officials pausing after next month with a deposit rate of 3.75%, though money markets are pricing a peak of about 4% later this year.
“Right now policymakers just have to err on the side of saying ‘we have lots of options, options are on the table and we will keep hiking if needed,’” Morgan Stanley Chief Global Economist Seth Carpenter told Bloomberg TV. “I don’t think they have a chance anytime soon to declare victory.”
One big question is how rapidly rising rates, which act with a lag, are filtering through to the economy.
“How strong transmission turns out to be in practice will determine the effect of a given rate hike on inflation, and this will be reflected in the expected policy path,” according to Lagarde, who said the early results are becoming visible in sectors including manufacturing and construction that are more sensitive to rate changes.
Lagarde and her colleagues are gathering amid a worsening economic backdrop. Data last week signaled activity in the 20-nation euro zone almost stalled in June. On Monday, figures showed an unexpectedly large drop in Germany’s business outlook.
While economic expansion is “on the soft side,” Latvian central bank Governor Martins Kazaks told Bloomberg TV earlier Tuesday that it’s not weak enough to bring down inflation by itself. He, along with his Lithuanian counterpart Gediminas Simkus, left the door open to rate hikes beyond July.
“I wouldn’t be surprised if we continue hiking also in September,” Simkus said.
Wherever rates settle, they’re likely to remain there for some time.
“We need to communicate clearly that we will stay ‘at those levels for as long as necessary,’” Lagarde said. “This will ensure that hiking rates does not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialize.”
That’s all the more important as what she describes as “second phase of the inflation process” gains strength, with workers seeking a “catch-up” in wages to recover lost income.
“Faced with a more persistent inflation process, we need a more persistent policy – one that not only produces sufficient tightening today, but also maintains restrictive conditions until we can be confident that this second phase of the inflation process has been resolved,” Lagarde said.
–With assistance from Francine Lacqua and Greg Ritchie.
(Updates with ECB’s Simkus starting in ninth paragraph.)
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