ECB looks set to hike rates despite fall in factory gate prices across eurozone

The European Central Bank is set to increase its key rate by 50 basis points, or half a point, at each of the next two meetings before slowing to 25 basis-point pace after that.

Eurozone industrial producers, or factory gate prices, fell in January from December, with Ireland posting the sharpest decline, but the European Central Bank will still hike official interest rates, economists say.        

The Eurostat figures show eurozone industrial producer prices fell by 2.8% in the month, with prices in Ireland tumbling by over 25%.

Euro area industrial #ProducerPrices -2.8% in January 2023 over December 2022, +15.0% over January 2022 https://t.co/5JuePnPTGV pic.twitter.com/o2V0qFJZMZ

— EU_Eurostat (@EU_Eurostat) March 3, 2023

However, the month-on-month eurozone declines were led by producer energy products, while many prices rose, including for intermediate goods, capital goods, and consumer goods. 

Economists at Morgan Stanley raised their forecasts for the ECB's key interest rate to 4% because core inflation is likely to peak later and higher than previously expected.

Morgan Stanley increased its forecast for the so-called terminal, or peak rate, from 3.25% previously, according to a research note. The ECB is set to increase its key rate by 50 basis points, or half a point, at each of the next two meetings before slowing to 25 basis-point pace after that.

“A much later peak in core inflation is the catalyst for more ECB hikes in the months ahead,” Morgan Stanley economists said in the research note. “Our new inflation path sees the ECB being confronted with rising core inflation at the May meeting,” they said. 

A number of ECB policymakers spoke on expectations for future rate hikes. Head of the Belgian central bank Pierre Wunsch said market bets for interest rates to reach a 4% peak may prove accurate if underlying price pressures remain elevated. 

How far borrowing costs must rise “depends very much on the evolution of core inflation”, Mr Wunsch said, referring to the measure of consumer-price growth that strips out items such as energy and food.

“If we don’t get clear signals that core inflation is going down, we’ll have to do more,” he told journalists in Brussels.

That means “looking at rates of 4% would not be excluded”, Mr Wunsch said. “But I want to insist, I won’t make any judgment on where rates would have to go without seeing developments in core inflation,” he said. 

ECB vice president Luis de Guindos said underlying price pressures will be an important factor for future monetary-policy decisions. 

Additional reporting Bloomberg