The ECB director warns of persistent inflation.
(Photo: imago images / photothek)
Paris, Frankfort According to two of its leading currency watchdogs, the European Central Bank (ECB) still has a way to go on its rate hike course in the fight against inflation. ECB Director Isabel Schnabel and France’s head of the central bank, Francois Villeroy de Galhau, pointed out the persistently high level of inflation on Friday.
With their statements, they ensured that interest rate expectations on the financial market rose again a bit. The money market is now expecting the ECB to raise interest rates to around 3.75 percent by the summer. At the beginning of the month, the interest rate peak was more likely to be located at 3.4 percent.
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Markets expect inflation to fall very quickly towards the ECB’s 2% target and then stay there while the economy also does well, Schnabel said in an interview with Bloomberg published on Friday. “That would be a very good result, but there is a risk that inflation will prove more persistent than what is currently priced into financial markets,” she warned.
According to the German economist, the ECB might have to act more vigorously if the economy’s reaction to the central bank’s tightening measures turns out to be weaker than it has been in the past.
There is a risk that inflation will prove more persistent than currently priced into financial markets. ECB Director Isabel Schnabel
“We have to be careful not to declare victory too early,” France’s central bank chief Villeroy said in a speech to financial analysts. From his point of view, the ECB could possibly not reach the peak of its rate hike course until September. “I think it’s possible that we’ll reach the summit by summer, which officially ends in September,” said the ECB Governing Council member.
The ECB has already hiked interest rates five times in a row
According to Villeroy, the deposit rate, which banks receive from the central bank for parking excess funds and which is currently the benchmark interest rate in the financial markets, is likely to be raised to more than 3.00 percent.
The ECB has raised interest rates five times in a row since July 2022, most recently by 0.50 percentage points in February. She has also already announced a further increase in March by another half a percentage point. This would increase the deposit rate from the current 2.50 percent to 3.00 percent.
What is to come after March is still open. In any case, there can be no talk of the all-clear on inflation at the moment. Inflation was still 8.50 percent in January. That is more than four times the ECB target.
Core inflation of 5.2 percent worries central bankers
In addition, core inflation, which excludes volatile energy, food, alcohol and tobacco prices, held steady at 5.2 percent in January. This worries many monetary authorities.
According to Schnabel, a rate hike of half a percentage point at the ECB’s next interest rate meeting on March 16 is “necessary under practically all plausible scenarios.” Villeroy also expects this.
However, both have different assessments of the current level of interest rates. According to Villeroy, the ECB’s interest rate hikes have already reached the so-called restrictive level, at which an economy is slowed down.
Schnabel, on the other hand, is not so sure. “It’s not that easy to judge whether our measures are already restrictive,” she said in the interview.
Most currency watchdogs had recently expressed the expectation that the ECB would raise interest rates again at the interest rate meeting after next on May 4th.
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