ECB signals further interest rate rises beyond March

The European Central Bank (ECB) will continue to raise interest rates beyond March, the bank’s chief economist Philip Lane has confirmed.

This is the first time Mr Lane has signalled that Frankfurt’s monetary tightening would continue after the expected half-point rise later this month.

“The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting,” he told an event in Trinity College Dublin on Monday.

The “exact calibration” beyond March will depend on the ECB’s new economic forecasts, which come out next week, and on incoming data, he said.

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His comments come on the back of last week’s higher-than-expected inflation numbers for the euro zone, which stoked further concern that inflation is now stickier than markets and analysts had expected.

“By bringing the key policy rates to a sufficiently restrictive level and fostering a period of below-trend growth through the dampening of demand, we will counteract above-target medium-term inflation pressures and also ensure that the prolonged phase of above-target inflation does not become embedded through a de-anchoring of inflation expectations,” Mr Lane said.

“The dampening of demand through the tightening of monetary policy means that price setters and wage setters are on notice that excessive price and wage increases will not be sustainable,” he said.

[ Irish consumers get mixed signals on inflation as ECB gears up for more rate hikes ]

The ECB is expected to opt for another half-point bump in rates on Thursday next week, bringing its main refinancing rate, the one that affects mortgages, to 3.5 per cent, up from zero per cent last July. Markets are expecting this to rise to close to 4 per cent by the summer.

Mr Lane admitted the latest data gave rise to something of “a mixed picture”. While price pressures from the energy commodities and raw materials were easing, food-related costs and wage growth remained strong, he said.

“The heatmap suggests still-strong inflationary pressures, but some signs of easing are emerging,” Mr Lane said.

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The latest harmonised index of consumer prices (HICP) showed inflation in the Irish economy unexpectedly rose to 8 per cent in February. That fed into a headline rate for the euro zone of 8.5 per cent in February, down fractionally from January’s 8.6 per cent but above earlier expectations of a more significant decline.

More worryingly, core inflation, which strips out energy and food prices (an indicator watched closely by the ECB), rose from 5.3 per cent to 5.6 per cent, a record for the euro zone, and a reading that will underpin expectations of higher interest rates.

[ ECB confronts a cold reality: companies are cashing in on inflation ]

“Compared to the peaks during the reopening phase of last year, the latest observations point to weaker pressures from the energy commodities, non-energy and non-food commodities, global and domestic economic activity and supply side bottlenecks,” Mr Lane said.

[ Deluge of inflation data pushes US borrowing costs to 2007 levels ]

“By contrast, stronger pressures are indicated by the indicators for food-related costs and labour market developments, in particular from the tight labour market and from wage growth,” he said.

The former Central Bank of Ireland governor said wages were likely to be a prime driver of inflation over the next two to three years.

“The importance of labour costs in total costs in many sectors (especially in the services category) means that wage inflation is deeply inter-connected with price inflation,” he said, noting contract negotiations during 2022 have typically delivered a 4.4 per cent wage increase for 2022 and a 4.8 per cent increase for 2023.

“The wage adjustment process may put upward pressure on price inflation over the next two or three years, even if the long-term behaviour of wages were ultimately unaffected by the current inflation shock (with the stability of long-term inflation expectations and aligned long-term wage dynamics reinforcing each other),” Mr Lane said.