Christine Lagarde has warned that underlying price pressures will remain “sticky in the short term” and signalled that further interest rate rises from the European Central Bank are very likely as “inflation is a monster that we need to knock on the head”.
The ECB was not seeking to “break the economy” with rate increases, Lagarde told Spain’s El Correo, as she appealed for banks to reschedule debt repayments for households struggling to cope with soaring borrowing costs on variable-rate mortgages.
“We are making progress, but we still have work to do . . . For the moment, the economy is resilient, employment is robust and unemployment is the lowest it has ever been,” the ECB president said, while urging lenders to consider the “reputational side” of giving big pay rises to executives.
Lagarde’s comments are the latest sign that ECB officials are fretting about persistently high inflation and the further rate rises needed to tame it — particularly after core price growth, which excludes energy and food, hit a new record high in the eurozone in February.
Eurozone inflation has fallen for four months after hitting a record 10.6 per cent in October, mainly because of decelerating energy prices. However, headline inflation fell less than expected to 8.5 per cent in the year to February and the core measure hit a new high of 5.6 per cent.
Marco Valli, chief European economist at Italian bank UniCredit, said the data was “likely to have implications for ECB policy because influential members of the governing council have pretty explicitly linked the future rate trajectory to the evolution of core inflation”.
Lagarde said it was “too early to declare victory” in the fight to return inflation to the ECB’s 2 per cent target, even though energy price growth had slowed. She predicted that headline inflation would keep falling, but underlying price growth would remain “too high” in the short term — meaning that the central bank was “very, very likely” to go ahead with a well-flagged, half-percentage point rate 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 jump in the bank’s deposit rate to 4 per cent later this year, up from its current level of 2.5 per cent. That would overtake the 2001 peak of 3.75 per cent.
There are similar concerns in the US, where high inflation and strong labour market and wage data have raised doubts over whether the Federal Reserve will stick with quarter point rate rises or return 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 this assumption may be wrong.
Rising interest rates have boosted the profits of commercial European banks by allowing them to increase the interest they charge on loans faster than they increase the rate savers earn on deposits.
In countries such as Spain that have a high proportion of variable-rate mortgages, there are fears households could find it hard to cope with the higher cost of borrowing.
“I’m sure many banks are prepared to reconsider loan conditions and prepared to spread repayments over time,” said Lagarde. “And not out of charity,” she added, pointing out that it was in lenders’ interests to avoid a rise in bad loans.
UniCredit, Italy’s second-largest bank, has proposed lifting the pay of its chief executive Andrea Orcel by 30 per cent to €9.75mn a year, making him one of the highest-paid European bank bosses.
“There is obviously a reputational side to those kinds of decisions that bank leaders should be aware of,” said Lagarde.
Source: Economy - ft.com
