Investors have been put on notice that central bankers on both sides of the Atlantic will “stay the course” on interest rate increases to cool down their economies and tame high inflation.
European Central Bank president Christine Lagarde warned that further big rate rises lay ahead in comments later echoed by a top official at the US Federal Reserve.
“We shall stay the course until . . . we can return inflation to 2 per cent in a timely manner,” the ECB president said in a panel discussion during the World Economic Forum.
Lael Brainard, the vice-chair of the Fed, signalled that the US central bank also had more to do to get inflation closer to its 2 per cent target, despite signs that consumer spending is starting to ebb, the labour market is cooling and price pressures have eased.
“Inflation is high, and it will take time and resolve to get it back down to 2 per cent. We are determined to stay the course,” Brainard said at an event hosted by the University of Chicago’s Booth School of Business.
The Fed and the ECB have rapidly raised interest rates since last year to curb inflation they initially dismissed as “transitory”. The two central banks are assessing how much further to squeeze their economies, which will be complicated by the time needed for rate rises to be felt in the economy.
Lagarde said financial markets should “revise their position” that the ECB would soon slow down its rate rises in response to signs that eurozone inflation has peaked.
Krishna Guha, of research company Evercore ISI, said the ECB was “earlier in the tightening cycle than the Fed” and that its “default path” was to continue with half-point moves at meetings in February and March. Eurozone rates remain lower than US and UK borrowing costs.
Brainard did not comment on the size of the Fed’s next rate increase, due to be announced on February 1. Most officials have signalled their support for the US central bank to shift from half point increases down to 0.25 percentage points, in contrast with expectations for the ECB.
Most officials now expect the US federal funds rate to peak at between 5 per cent and 5.25 per cent, suggesting two more quarter-point rate rises after February’s move.
The ECB raised interest rates by a total of 2.5 percentage points last year to combat a surge in prices, when inflation hit an all-time high of 10.6 per cent in October.
Lagarde added that headline, core and all other measures of inflation were still a concern at the central bank in Frankfurt. “Inflation, by all accounts, is way too high,” she said.
Headline inflation has fallen in recent months, but the core measure — which excludes movements in food and energy prices and is seen as a better measure of underlying price pressures — rose in the year to December to 5.2 per cent, from 5 per cent the previous month.
“It will take several months before core inflation eases to levels that make the ECB more comfortable,” said Frederik Ducrozet, chief economist at Pictet Wealth Management. “Virtually all ECB officials appear to be united in their fight against inflation, doves and hawks alike.”
Lagarde added that the eurozone’s resilient jobs market could lead to higher wages, in contrast to Brainard, who said US wages “do not appear to be driving inflation in a 1970s-style wage — price spiral”.
Brainard noted evidence that inflation is starting to ebb and the economy is beginning to cool. But she said businesses and households had yet to see the “full effect” of last year’s rate rises, when they increased from near zero to more than 4 per cent.