Lagarde and Bailey raise interest rates again and promise further increases
The European Central Bank and the Bank of England raised their key interest rates by 50 basis points on Thursday, less than 24 hours after the Fed did the same.
The two central banks promised that further tightening will follow, saying that consumer prices are still “far too high”.
In the eurozone, “interest rates will still have to rise significantly at a steady pace” to make sure they are restrictive enough to return inflation to the ECB’s 2% target in a “timely” manner, as Christine Lagarde, the bank’s chief said.
The Fed also stressed that interest rates need to stay high through 2023. BoE’s chief, Andrew Bailey, though split with Europe and US by suggesting inflation has peaked.
Bailey said the Bank expects inflation to start falling more rapidly from late next spring but insisted that it had to raise rates on Thursday to offset pressures from a tight labor market.
ECB economists forecast that headline inflation and “Core” inflation, which excludes energy and food, will recede from the current level of 6.6%, according to ECB economists.
They also forecast that headline inflation is to slow down from 10% in the present. Nevertheless, wage growth and rising prices for services will keep both gauges above the target until at least 2025, according to Reuters.
Bailey also warned that private sector pay, which has risen 6.9% between August and October against last year, will remain high through most of 2023.
The good news is that the two central banks expect a milder recession than previously feared. Again, a shallow downturn would keep demand and salaries high, fueling inflation.
The investors question the timing of raising rates, for all three governors failed to predict inflation and start the tightening policy sooner.
According to Refinitiv data, markets expect UK rates to peak at 4.5% in August 2023, from 3.5% currently.
In the eurozone, they are betting the ECB will push its deposit rate to 3% from 2% by June and stop there.