Interest rates are close to ‘cruising altitude’, says ECB President

Interest rates are close to ‘cruising altitude’, says ECB President

2023-06-01 14:03:39

European Central Bank President Christine Lagarde. THILO SCHMUELGEN / REUTERS

Over the past nine months, the monetary institution has decided on seven rate hikes in a row, a total of 3.75 percentage points.

The European Central Bank (ECB) will continue to hike rates, but thecruising altitudeis approaching, at a time when inflation is falling, said Thursday its president Christine Lagarde, during a banking congress. “We will keep moving forward – with determination and without discouragement – until we see inflation return to our medium-term target of 2% in due course.“, declared Christine Lagarde in Hanover, in front of the congress of the German Savings Banks.

Over the past nine months, the monetary institution has decided on seven rate hikes in a row, ie a cumulative 3.75 percentage points, with a step of 0.25 point in May, which was the lowest of the cycle. “At departure, the aircraft should climb steeply and accelerate rapidly. But as it gets closer to its target altitude, it can reduce acceleration and maintain its current speed“Explained in the tone of the metaphor the French central banker. “Now we are approaching our cruising altitude“, she added.


The effects of these accumulated rate hikes are visible – ebb in credit, slump in demand and therefore in activity – but the ECB is still far from having won the battle against high inflation, even if the aggregate is clearly on the back. Since peaking at 10.6% year-on-year last October, eurozone inflation fell to 6.1% in May, according to Eurostat on Thursday. This is still three times above the target set by the ECB.

«We therefore expect the ECB to hike interest rates twice by more than 25 basis points in June and July before keeping them unchanged.”, which would bring the deposit rate to 3.75%, according to Salomon Fiedler, an analyst at Berenberg. If headline inflation declines, due to a decline in energy prices, apart from this component, so-calledunderlyingremains high, fueled by wage increases. These last “become a bigger driver of inflation“, according to Christine Lagarde.

The unemployment rate in the euro zone is at its lowest and workers have strong bargaining power to recover past losses in purchasing power, for example in Germany. Gold, “the longer inflation stays above our target, the greater the risk of it infiltrating people’s expectations“warned Christine Lagarde. ECB sees inflation back to 2%before the second half of 2025», Which will make four years of exaggerated price increases.


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