The European Central Bank (ECB) President Christine Lagarde said on Thursday it is "not pausing" its current cycle of interest rate hikes as "the inflation outlook continues to be too high".
Speaking at a press conference after the ECB’s decision was announced to raise interest rates by 25 basis points to 3.25%, Lagarde also suggested that further increases could be on the way.
“We have more ground to cover and we are not pausing. That’s extremely clear,” she said.
Lagarde further highlighted a number of “significant” upside risks to the central bank’s medium term inflation outlook.
“These include existing pipeline pressures that could send retail prices higher than expected in the near term.”
She also said recent negotiated wage agreements added to the upside risks – especially if profit margins remain high.
The decision by the central bank, which also said it would stop reinvesting cash from maturing debt in its €3.2tn (£2.8tn) euro Asset Purchase Programme from July, was in line with analysts’ expectations. Although, policymakers had been split in the run up to the meeting between a 25 basis point and a 50 basis point rise.
However, the rate rise was less than the previous increases, representing a slowing in the ECB’s programme of hikes.
“Overall, the incoming information broadly supports the assessment of the medium-term inflation outlook that we formed at our previous meeting. Headline inflation has declined over recent months, but underlying price pressures remain strong. At the same time, our past rate increases are being transmitted forcefully to euro area financing and monetary conditions, while the lags and strength of transmission to the real economy remain uncertain,” Lagarde also noted.
The announcement comes after inflation figures were released earlier this week showing an increase in the headline rate to 7% for April. However, core inflation – which excludes food, fuel, tobacco and alcohol – slowed to 5.6% from 5.7%.
End of tightening cycle?
The move follows a similar increase by the US Federal Reserve on Wednesday after it raised its federal funds rate by 25 basis points, marking the 10th increase in borrowing costs since March 2022 – and the highest level since September 2007.
However, the Fed hinted that the tightening cycle may be at an end.
Laith Khalaf, head of investment analysis at AJ Bell, commented: “As ever, when it comes to central bankers, it’s best to watch their feet rather than their eyes, as they are practiced in the art of selling a dummy. There are however reasons to believe that in the US, rate hikes could be over for the time being.
“The turmoil in the banking sector has been a game-changer, with tightening credit conditions expected to do a lot of the heavy lifting when it comes to cooling the US economy, relieving the central bank of this task. Inflation is falling back and some froth has been blown off the labour market too, so expectations are now building for rate cuts later in the year.”
Khalaf further noted that current market pricing suggests there could be three rate cuts by the end of 2023 in the US.
“That seems out of kilter with the forecast of Federal Reserve policy makers, which are pointing to cuts in 2024, but not before. Whatever the precise timing, it seems likely we are now turning towards a new phase in the cycle where markets are on high alert for signs of rate cuts, rather than just a pause in rate hikes.”
Video: ECB raises rates, keeps options open