"Prices Will Fall but Core Inflation Remains Too High"
0.5%P Base Rate Hike Likely at Board Meeting on 16th
Market Watches Whether Final Rate Ceiling Will Rise
Christine Lagarde, President of the European Central Bank (ECB), stated that there is still more work to be done to control the inflation 'monster.' The possibility of a 0.5 percentage point rate hike (big step) at the ECB Governing Council meeting scheduled for the 16th (local time) has increased.
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According to major foreign media on the 6th, President Lagarde recently said in an interview with the Spanish daily El Correo that "core inflation pressures will remain sticky in the short term."
She explained, "Inflation is the monster we have to price with our heads. We are making progress, but there is still much to be done. The economy is resilient, employment is strong, and the unemployment rate is at an all-time low."
As the Eurozone economy appears to be more resilient than expected, President Lagarde also stated in an interview with the Spanish media Vocento that it is almost certain that the key interest rate will be raised by 0.5 percentage points this month. She continues to send a message to the market that additional rate hikes will be implemented to curb persistent high inflation. Foreign media interpreted this as a sign that ECB officials are anxious.
In fact, inflation is proving difficult to control not only in the United States but also in the Eurozone. Last month, the Eurozone core Consumer Price Index (CPI), excluding food and energy, rose by 5.6%, an increase from the previous month's 5.3%. Although the overall CPI inflation rate slowed to 8.5%, it still exceeded market expectations.
President Lagarde emphasized, "It is still too early to declare victory in the fight to bring inflation back to the ECB's target of 2%," adding, "Prices are expected to continue to decline, but core inflation remains too high." However, she also stated, "We are not trying to break the economy," urging banks to ease the burden of loan repayments. She said, "I am confident that many banks are prepared to renegotiate loan terms and allow installment repayments over a long period," emphasizing, "This is not charity but a measure to avoid an increase in non-performing loans and is also in the banks' interests."
As President Lagarde predicted, the ECB is expected to take a big step at the Governing Council meeting on the 16th. Following last month's 0.5% rate hike to 2.5%, another 0.5 percentage point increase is anticipated this month. As the Eurozone economy shows little sign of weakening, the market is also raising its forecast for the ECB's terminal rate. Deutsche Bank expects the ECB to raise the key interest rate to 3.75% in June, which is 0.25 percentage points higher than the previously forecast terminal rate of 3.5%.
Marco Balli, Chief European Economist at UniCredit, an Italian bank, said, "Influential ECB members are clearly linking the future interest rate trajectory to core inflation," and predicted, "This (core inflation) indicator is likely to influence ECB policy."
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