European Central Bank Governing Council member Pierre Wunsch said market bets for interest rates to reach a 4% peak may prove accurate if underlying price pressures remain elevated.
(Bloomberg) — European Central Bank Governing Council member Pierre Wunsch said market bets for interest rates to reach a 4% peak may prove accurate if underlying price pressures remain elevated.
How far borrowing costs must rise “depends very much on the evolution of core inflation,” the Belgian central bank chief said, referring to the measure of consumer-price growth that strips out items such as energy and food.
“If we don’t get clear signals that core inflation is going down, we will have to do more,” he told journalists in Brussels.
That means “looking at rates of 4% would not be excluded,” Wunsch said. “But I want to insist, I won’t make any judgment on where rates would have to go without seeing developments in core inflation.”
Officials are increasingly focusing on underlying prices to determine the monetary-policy path. The gauge surprisingly hit a record 5.6% in February — even as headline inflation eased slightly, figures Thursday showed.
National data this week foreshadowing the euro-area report prompted investors to raise their wagers on how far the ECB will have to take borrowing costs, pricing a peak of 4% for the first time.
Central bankers are worried that stubborn core pressures will lead workers to seek higher salaries, potentially triggering another round of price increases and complicating the task of returning inflation to the 2% target.
Policymakers debated the matter at length at their last rate-setting meeting in February, according to an account released Thursday. Some cautioned against “focusing too much” on the underlying measure, saying “elements of core inflation could move quite quickly.”
Danske Bank analysts this week lifted their forecast for the peak in the ECB’s deposit rate to 4%, citing a resilient economy and stubborn underlying inflation as reasons to keep borrowing costs “in restrictive territory for longer.” The rate currently stands at 2.5%.
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