Towards further rate hikes? This is what suggests, in an interview published this Wednesday, May 10 in the Japanese press, the President of the European Central Bank Christine Lagarde. Faced with inflation still deemed too high, the ECB may have no choice. Over the past nine months, the European monetary institution has “acted very deliberately and decisively in order to fight against inflation” with seven rate hikes in a row until May, recalled the former French minister in a daily maintenance Nikkei.
The French leader, however, acknowledged that there was “still a long way to go”, suggesting that the guardians of the euro will have to further tighten the screw on credit, its favorite weapon to lower price tensions.
“There will undoubtedly be further rate hikes”
Foodstuffs and a wide range of goods continue to see their prices rise. Inflation in the euro zone reached 7% in April, still sailing well above the 2% target set by the ECB. “There are factors that can induce significant upside risks to the outlook for inflation”, “in particular, with regard to wage increases in various European countries”, according to Christine Lagarde. The rise in prices weighs on the purchasing power of households and fuels demands for wage increases.
Economists now expect the monetary institute to raise interest rates at its two scheduled meetings before the summer break. “Undoubtedly there will be more rate hikes in the future, unless inflation subsides. Current forecasts seem to indicate that the euro zone will not tip into recession, even if the situations differ depending on the country”, noted recently in L’Express, the economist Catherine Lubochinsky, professor at the University of Paris II-Panthéon Assas.
“Based on current data, we will have to continue to raise interest rates for longer than expected,” ECB Governing Council member Peter Kazimir said in a blog post on Tuesday, adding that should be able to judge the effectiveness of monetary firming from September.
Regarding the economy, Christine Lagarde believes that the euro zone is “in a better position than we feared six months ago”, when Europe had to deal with energy supplies by having to do without Russian gas. However, a shadow remains in her view: great uncertainties remain, “including what will happen in Russia’s war of aggression against Ukraine, and some emerging signs of weakness in demand for manufactured goods”.
No break in the United States
The trend is the same in the United States, since the American central bank, a week after having changed its tone and hinted at a pause, no longer rules out a further rate hike at its next meeting. One of its officials, the president of the New York Fed, John Williams, tried on Tuesday to clarify the position of the institution: “We did not say that we were done raising rates (… ) We have not decided what we are going to do at our next meetings, (…) the evolution of the economy will obviously affect our decisions”, he added, in front of the Economic Club of New York .
The Fed raised rates by a quarter point a week ago after its last meeting, the tenth straight hike. These rate increases increase the cost of loans granted to households and companies, in order to slow down activity and curb inflation.
The effects of these actions on the real economy take months to be felt. And, recently, the banking crisis has added an extra layer of hardship for borrowers, as banks are making it less easy to extend credit to their customers, which acts as a rate hike. The next Fed meeting will be June 13-14.
