European Central Bank Raises Rates to Highest Level Since 2001
“We are not thinking about pausing,” Ms. Lagarde said on Thursday. It is “very likely” that the bank will raise rates again at its next meeting in July, as long as there isn’t a “material change” to the bank’s expectations for inflation, she added.
“Are we done? Have we finished the journey? No, we are not at destination,” Ms. Lagarde said, adding that policymakers will only know when they get to the interest rate they will stay at once they get there.
Policymakers say they want to avoid the risk of declaring victory in their fight against rising prices prematurely, even as the eurozone’s annual rate of inflation has dropped from its double-digit peak late last year to 6.1 percent in May, the slowest pace in more than a year. Much of the slowdown can be attributed to lower wholesale energy costs, but central bankers have been alert to signs that inflation is becoming embedded in the economy, which could impede them from getting inflation back to the 2 percent target. For example, higher wage costs for companies will cause core inflation, which excludes energy and food costs, to be higher than previously expected.
The central bank forecasts inflation to average 5.4 percent this year but still be above target in two years’ time, at 2.2. percent, slightly higher than the previous projections set out three months ago.
But as inflation slows, the question of how much policy tightening is the right amount has become difficult to gauge. Too much could restrain the economy more than necessary and cause or worsen a recession. Too little could allow inflation to become a persistent problem that policymakers can’t root out. It’s a challenge facing central bankers around the globe.
Source: The New York Times
