Daily Times

European Central Bank president Christine Lagarde said Tuesday it was “unlikely” policymakers could state soon when interest rates had peaked as they battle stubbornly high inflation, and pledged yet another hike in July.

“It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached,” she said at the start of an annual gathering of central bank chiefs and economists in Sintra, southern Portugal.

The ECB’s policy would be decided “meeting by meeting”, she said, but added that “barring a material change to the outlook, we will continue to increase rates in July”, at the bank’s next meeting. The central bank has hiked rates at the fastest pace ever over the past year in a bid to cool inflation after Russia’s war in Ukraine sent energy and food prices surging.

The Frankfurt institution raised borrowing costs by another 0.25 percentage points this month, taking the key deposit rate to a 22-year high at 3.50 percent. While cost increases in the 20 countries that use the euro are starting to ease, inflation was proving “persistent”, said Lagarde. “This persistence is caused by the fact that inflation is working its way through the economy in phases,” she said.

While sky-high energy prices that drove inflation up last year have come down, ECB officials are now concerned about the impact of rising wages as workers demand higher salaries to cover rising costs, and the labour market remains tight. “Workers have so far lost out from the inflation shock, seeing large real wage declines, which is triggering a sustained wage ‘catch-up’ process as they try to recover their losses,” said Lagarde.

Falling energy costs helped eurozone inflation slow to 6.1 percent in May year-on-year, down from a peak of 10.6 percent in October.

Nevertheless, it remains three times above the ECB’s two-percent target, and in its latest projections released earlier this month, the central bank slightly raised its inflation forecasts.

The bank is pushing on with its aggressive hiking cycle even as the eurozone outlook darkens, with its economy shrinking slightly for two straight quarters at the end of 2022 and the start of 2023, meeting the technical definition of a recession.