European Central Bank (ECB) President Christine Lagarde has warned that underlying price pressures will remain “sticky in the short term,” signalling further interest rate rises as inflation continues to pose a challenge for the central bank.
Speaking to Spain’s El Correo, Lagarde stated that the ECB was not trying to “break the economy” with rate increases, adding that banks should reschedule debt repayments for households facing difficulties with soaring borrowing costs on variable-rate mortgages.
Lagarde also urged lenders to consider the reputational impact of giving big pay rises to executives.
The latest inflation data for the eurozone showed a new record high for core price growth in February, with the headline inflation falling less than expected to 8.5% in the year.
The ECB president said it was “too early to declare victory” in the fight to return inflation to the ECB’s 2% target, predicting that underlying price growth would remain “too high” in the short term.
This means that the ECB is “very, very likely” to go ahead with a half-percentage point rate rise at its next meeting, scheduled for March 16.
The ECB has already raised rates by 3 percentage points since last summer, and financial markets are predicting a jump in the bank’s deposit rate to 4% later this year, overtaking the 2001 peak of 3.75%.
Meanwhile, in the US, concerns are growing over whether the Federal Reserve will stick with quarter-point rate rises or return to a half-point move at its March 21-22 meeting.
In the UK, financial markets are betting that the Bank of England will raise rates further, although Governor Andrew Bailey has indicated that this assumption may be incorrect.
Lagarde’s comments come amid fears that households in countries such as Spain could find it hard to cope with the higher cost of borrowing due to the high proportion of variable-rate mortgages. She appealed to banks to reconsider loan conditions and spread repayments over time, adding that avoiding a rise in bad loans was also in their interest.