Christine Lagarde warned that underlying price pressures will remain “sticky in the near term” and signaled that further interest rate hikes from the European Central Bank are very likely as “inflation is a monster that we must hit in the head”.
The ECB was not looking to “break the economy” with rate hikes, Lagarde told El Correo in Spain, as she called on banks to reschedule debt repayments for households struggling to cope with the coronavirus crisis. soaring borrowing costs on variable rate mortgages.
“We are making progress, but we still have work to do. . . At the moment the economy is resilient, employment is robust and unemployment is at an all time low,” the ECB President said, while urging lenders to consider the “reputation side” of granting large salary increases for executives.
Lagarde’s comments are the latest sign that ECB officials are concerned about continued high inflation and further rate hikes needed to bring it under control, especially after underlying price growth, which rules out energy and food, reached a new record high in the euro zone in February.
Eurozone inflation fell for four months after hitting a record 10.6% in October, mainly due to decelerating energy prices. However, headline inflation fell less than expected to 8.5% in the year to February and the core measure hit a new high of 5.6%.
Marco Valli, chief European economist at Italian bank UniCredit, said the data was “likely to have implications for ECB policy as influential members of the Governing Council have quite explicitly linked the future path of rates to the evolution of underlying inflation”.
Lagarde said it was “too early to claim victory” in the fight to bring inflation back to the ECB’s 2% target, even though energy price growth had slowed. She predicted headline inflation would continue to fall, but underlying price growth would remain ‘too high’ in the near term – meaning the central bank was ‘very, very likely’ to go higher. ahead with a well-posted rate of half a percentage point. to rise at its next meeting on March 16.
The ECB has raised rates by 3 percentage points since last summer. Financial markets are pricing in a hike in the bank’s deposit rate to 4% later this year, up from its current level of 2.5%. This would surpass the 2001 high of 3.75%.
There are similar concerns in the United States, where high inflation and strong labor market and wage data have raised doubts about whether the Federal Reserve will stick to quarter rate hikes. point or revert to a half-point move at its March 21-22 meeting.
In the UK, financial markets are betting that the Bank of England will raise rates further, but its governor Andrew Bailey said last week that this assumption could be wrong.
Rising interest rates have boosted the profits of European commercial banks by allowing them to raise the interest they charge on loans faster than they raise the rate savers earn on their deposits.
In countries like Spain which have a high proportion of variable rate mortgages, there are fears that households will struggle to cope with the higher cost of borrowing.
“I’m sure many banks are ready to reconsider loan terms and spread repayments over time,” Lagarde said. “And not out of charity,” she added, stressing that it was in lenders’ interests to avoid an increase in bad debts.
UniCredit, Italy’s second-largest bank, has offered to raise its chief executive Andrea Orcel’s salary by 30% to 9.75 million euros a year, making him one of Europe’s highest-paid bank bosses.
“There is obviously a reputational side to these kinds of decisions that banking executives should be aware of,” Lagarde said.
. ECB must must for wrestle counter monster linflation according to Christine Lagarde