Philip Lane, chief economist at the European Central Bank, said that inflationary pressures in the euro area have begun to ease, including pressure on fundamental prices of great importance, but the bank will not stop raising interest rates until it is confident that prices will return. to growth within 2%.
The ECB has raised interest rates by three percentage points since July and promised another half a percentage point hike in March, hoping that higher financing costs will dampen demand enough to slow price growth from levels still above 8 percent.
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Lin said the impact of higher interest rates has begun to show in the economy, especially in the prices of services and other essentials, which do not include volatile fuel and food prices.
“There is real evidence that monetary policy has begun to bear fruit,” Lin said in an interview with Reuters. positions are expected to decrease.” step back a bit.”
And other bank officials, such as Isabelle Schnabel, a member of the board of directors, and Claes Nott, head of the Dutch central bank, expressed concern about the possibility of core inflation stabilizing, which could lead to its extension.
Lane identified three criteria by which the ECB should stop raising interest rates: low inflation expectations for three years, progress in reducing latent inflation, and impact on monetary policy.
“We all agree on the criterion of the importance of making sufficient progress on (lowering) core inflation,” Lin said.
He added that after interest rates stabilize, the bank intends to keep them at this level for some time and will not revise its plans after core inflation begins to decline significantly.
Asked how long interest rates could stay at growth-constraining levels, Lin replied: “It could go on for quite a long time, for several quarters.”
Markets expect the bank to raise its deposit rate, currently 2.5%, to around 4% by the end of the year, with interest rates expected to peak around 35 basis points this month alone, largely due to concerns about about unchanged core inflation. .
Downshift not only in fuel
While lower fuel prices have recently brought inflation down, Lin said a closer look at the data shows the decline is general.
“The actual retail prices of commodities are still very strong, but the mid phase was a good confirmation of price pressure,” he added.
“The fact that it is undergoing a transformation, including by reducing bottlenecks and global factors, suggests a significant reduction in inflation rates for energy, food and commodities,” he added.
Pricing pressures in the services sector are easing as supply recovers from post-pandemic bottlenecks, shifting the focus to wages.
Exclude a return to negative interest rates
Price pressure is easing to the point that Lean has signaled a cut in the ECB’s forecast due on March 16.
He pointed to factors influencing the rate of inflation, such as lower oil and gas prices, recession bottlenecks, the lifting of restrictions in China, an abundance of fiscal support and ECB measures to raise interest rates.
“Supply shocks are dampening inflationary pressures,” he said. “If we look further … to 2024 or 2025, monetary tightening will be much stronger than expected in December estimates, and this should be reflected in the new forecasts.”
But, he added, none of these shocks are enough for the European Central Bank to abandon plans to raise interest rates by 50 basis points.
While interest rate hikes may affect the economy at a slower pace than before, their impact could continue for a longer period as the bank is unlikely to return to negative interest rates.
Lin said the market has internalized a long-term equilibrium interest rate of around 2%, so a 250 basis point hike is effectively permanent and thus will dampen price pressures more sustainably.
