Friday, 28 April 2023

‘Not the Right Time to Stop’ Rate Hikes, ECB Chief Economist Says

by Earn Media

‘Not the Right Time to Stop’ Rate Hikes, ECB Chief Economist Says

Current indicators suggest the European Central Bank (ECB) should raise the interest rate in May, the monetary authority’s chief economist said. Future increases will depend on the economic data but this is still not the right time to stop, according to Philip Lane who believes the bank has to bring inflation back to the 2% target “in a timely manner.”

Leaving Interest Rate at Current Level Would Be ‘Inappropriate’ Despite Falling Inflation, Lane Says

Inflation in the euro area has dropped significantly between October, when it peaked at 10.6%, and March’s 6.9%. Nevertheless, the most important goal for its central bank is to make sure that it gets closer to 2%, Chief Economist of the ECB Philip Lane told Le Monde in a recent interview published by the bank on Tuesday.

While easing in some sectors, such as energy, inflationary pressures persist in others, like food, the top official noted, warning there’s a risk of “sticky” inflation. This is why it’s important that the ECB raises its interest rates again to ensure inflation returns to the target “in a timely manner,” he emphasized.

Inflation has been too high for almost two years, Lane admitted, attributing it to bottlenecks created by the pandemic and the energy shock resulting from Russia’s invasion of Ukraine. To deal with it, the ECB increased interest rates by 3.5 percentage points, from -0.5% to 3%, which is unprecedented for the eurozone.

“For our next Governing Council meeting on May 4, the current data are indicating that we should raise rates again,” said Philip Lane who sits on the bank’s Executive Board. He added that the analysis suggests it would be “inappropriate” to leave the deposit rate at the current 3% level and stressed:

This is still not the right time to stop. Beyond that, I don’t have a crystal ball, it will depend on the economic data.

The most important task is to bring inflation closer to 2% “within a reasonable time period,” ECB’s chief economist reiterated. The longer it stays too high, the greater the risk that people lose faith in the bank’s ability to return to its long-term target, he reasoned.

Lane’s statements for the French press come after several central bank governors, members of the ECB’s Governing Council, indicated in the past few weeks that a new rate hike is to be expected from the upcoming meeting next month.

By how much do you think the ECB will increase interest rates in May? Share your predictions in the comments section below.