In view of the persistently high price pressure in the euro area, the signs continue to point to interest rate hikes. ECB chief Christine Lagarde told the European Parliament's Economic and Monetary Affairs Committee on Monday that she was determined to continue the fight against inflation. It is up to the ECB to ensure price stability: "And that is what we will do," she added. She wants to see inflation fall to the target of two percent: "The sooner, the better". The future decisions would ensure that policy rates reached a sufficiently high level to achieve a timely return of inflation to the target level.
The ECB has already raised key interest rates seven times in a row by a total of 3.75 percentage points. According to many experts, a further increase of a quarter of a percentage point is likely to follow on 15 June. Although inflation in the eurozone eased noticeably in May, at 6.1 percent it is still well above the ECB's target of 2.0 percent. "Price pressure remains high," Lagarde concluded.
However, a ray of hope is that producer prices are rising surprisingly slowly, signalling that the wave of inflation is ebbing away. Manufacturers in the industry increased their prices by only 1.0 percent in April compared to the same month last year. In March, the increase had been 5.5 percent. In the statistics, the prices are listed from the factory gate - i.e. before the products are further processed or go on sale. They thus allow conclusions to be drawn about the development of consumer prices.
Nagel: "We have to be even more persistent"
According to Bundesbank President Joachim Nagel, however, the ECB may have to deal with the issue of interest rate hikes beyond the summer months. "For me, it is not certain that we will reach the interest rate peak as early as the summer," said the ECB Governing Council member in Bochum. Nagel thus contradicted the view of his French colleague Francois Villeroy de Galhau, who expects interest rates to peak for the time being in the coming months. According to Nagel, at the current level of inflation, there can be no talk of stable prices.
The underlying price pressure is also far too high and has hardly declined so far, the Bundesbank President stated. In May, core inflation – i.e. excluding food and energy – was 5.1 percent in Germany and 5.3 percent in the euro area. "Monetary policy must not and will therefore not let up in the fight against inflation. We have to be even more persistent than the current inflation," Nagel said.
The core rate is considered a good indicator of the underlying inflation trends and is therefore closely monitored by the monetary authorities. The ECB's next interest rate decision is due on 15 June. Ireland's central bank governor Gabriel Makhlouf expects further tightening in view of the ongoing price pressures in the euro area: "I think that we will probably see interest rate hikes in June and July, but beyond that, I think the picture is much less clear," he said recently.