More rate hikes to come amid 'too high' core inflation

ECB will have to raise borrowing costs 'as long as the underlying inflation hasn’t been tamped down'

Sun, 07 May, 2023 - 16:30

April Roach and Cagan Koc

The European Central Bank (ECB) needs to continue raising interest rates amid a “too high” underlying inflation rate, said Governing Council member Klaas Knot.

The ECB will have to raise borrowing costs “as long as the underlying inflation hasn’t been tamped down,” Mr Knot said in an interview.

“Our real problem at the moment is that core inflation is still too high.”

The central bank on Thursday raised the deposit rate by a quarter-point to 3.25%, following three moves of double that size.

ECB president Christine Lagarde also signalled that there will likely be more interest-rate hikes to come. She said:

We have more ground to cover, and we are not pausing.

Eurozone consumer prices, stripped of volatile items like fuel and food, rose 5.6% from a year ago in April — down just a shade from March’s record 5.7%.

The Dutch central banker, who is among the region’s more hawkish officials, said the ECB may reach its 2% inflation goal “sometime in 2025.”

“But our policy works with some delays so the biggest impacts of what we’ve done so far are still in the pipeline,” Mr Knot said.

“That is why we have deemed it somewhat responsible, and that was also my commitment in the meeting, to take a step back from half a percentage point to a quarter percentage point per meeting."

Since the ECB started raising rates last summer, the tracker household is now paying around €480 more in mortgage payments a month said managing director with MortgageLine Stephen Hamilton.

Hopefully for mortgage customers we are nearing the end of the increases.

"Inflation still a problem but the rate of increase is falling," he said.

In regard to fixed rates, Mr Hamilton said he expects "some if not all" banks to announce increases this month which will kick in sometime in June for new mortgages that are drawn down.

At press conference following the latest interest rate hike, Ms Lagarde said that underlying price pressures, despite easing in recent times, remained strong.

Food price inflation was running at around 13% across the eurozone.

- Bloomberg with additional reporting by the Irish Examiner