Underlying inflation in the euro zone will stay high in the near term so a 50 basis point European Central Bank interest rate increase later this month is increasingly certain, ECB President Christine Lagarde told Spanish media group Vocento.
The ECB has already raised rates by 3 percentage points since July and essentially promised another half a percentage point increase on March 16 but investors have recently speculated on an even bigger move given poor inflation data.
Lagarde said the flagged increase is now “very very likely” but she also warned that underlying inflation, which filters out volatile food and fuel prices, could stay uncomfortably high even as the overall inflation rate drops in the coming months.
“In the short term, core inflation is going to be high,” Grupo Vocento quoted Lagarde as saying on Sunday.
Several policymakers have warned recently that ECB rate hikes need to continue until core inflation turns around and starts falling towards the ECB’s 2 per cent target.
Underlying inflation rose to a record high 5.6 per cent last month and some policymakers fear that the increase is now due to a surge in wages in the services sector, which makes price growth more durable and difficult to break.
“We must continue to take whatever measures are necessary to bring inflation back to 2 per cent. And we will do so,” Lagarde said.
She added that the euro zone economy is holding up better than feared and output should accelerate from near stagnation in the closing quarter of 2022.