Brace yourself for two or more half-point rate hikes next year (and fewer bond purchases) as the European Central Bank embarks on the ‘long game’ in its inflation ‘battle’.
Ports and war metaphors aside – and there were plenty of those during ECB President Christine Lagarde’s press conference on Thursday – the message was clear: the bank will ease prices, even if it means a major slowdown in growth.
“What matters is the goal,” Ms. Lagarde said. “So don’t assume it’s a ‘one-shot’ 50 [basis points]. It’s more than that. I don’t know how many more times.”
It’s a hawkish turn that hasn’t kept up with its ECB counterparts. The Bank of England adjusted to the ECB’s rate hike on Thursday but signaled it will adopt a more cautious approach next year while the US Federal Reserve has already slowed its pace.
“We don’t pivot. We don’t waver,” Ms. Lagarde said. “We still have more to do. We have to go longer.”
The ECB’s main concern is that its ‘target’, a 2% inflation target that stands firm, is getting further and further away.
New forecasts show euro-zone prices to remain high longer this year with an average increase of 8.4 percent, remain high next year at 6.3 percent and 3.4 percent ahead of target in 2024 they will fall back to 2.3 percent in 2025.
ECB economists expect the eurozone economy to stagnate and grow just 0.5 percent.
That includes a “shallow and short-lived recession” that may start this month and last through early 2023, before rising to just under 2 percent in 2024 and 2025.
ECB economists expect the eurozone economy to stagnate and grow just 0.5 percent
But that depends on the course of Russia’s war in Ukraine, its impact on energy and food prices, and how wages respond to the rising cost of living.
While the recent drop in wholesale energy prices is good news, the ECB is concerned they have not fully caught up at the pump and cooler amid fears of a possible rise in inflation in January or February.
Food prices are becoming increasingly important. Although inflation in the euro zone and Ireland fell last month – to 10 percent and 8.9 percent respectively – food prices did the opposite.
Irish food prices rose 11.2 per cent year-on-year, with staples such as milk, cheese, eggs, butter, meat, bread and pasta rising at double-digit rates.
People feel it in their shopping baskets. The average annual grocery bill is now €1,000 higher than it was in 2021, according to research firm Kantar.
What does this mean for tariffs?
“That means another 50 basis point hike at our next meeting and possibly the one after – and possibly after,” Ms Lagarde said.
In addition to its interest rate strategy, the bank is trying to dissuade governments and banks from cheap financing.
It plans to withdraw (or not reinvest) an average of €15 billion per month under its asset purchase program through next March – about half of monthly redemptions – with further tightening thereafter.
How far that goes will depend on the battle of wills in the 25-member Governing Council (26 next year, after Croatia’s accession).
Ms Lagarde acknowledged that “not everyone agreed on the actual tactics” to control inflation this week. During a recession next year, it could become even more difficult to secure a deal, however shallow and short-lived.
https://www.independent.ie/business/world/european-central-bank-convinced-inflation-will-persist-and-digs-in-for-more-hikes-42223103.html The European Central Bank believes inflation will persist and is digging into more rate hikes