European Central Bank chief economist Philip Lane has indicated for the first time that interest rates will rise again in May, in addition to a hike widely expected to happen next week.
It means the ECB interest rate now looks set to be at least 3.25pc by May, the next scheduled meeting of policy makers after March 16th.
He made the speech during a speech to students and staff at Trinity College Dublin on the theme of assessing underlying inflation in the euro area, a measure that strips out volatile elements of inflation to determine the essential economic effect.
“The current information on underlying inflation pressures suggests that it will be appropriate to raise rates further beyond our March meeting, while the exact calibration beyond March should reflect the information contained in the upcoming macroeconomic projections, together with the incoming data on inflation and the operation of the monetary transmission mechanism,” he said.
The ECB has already been widely expected to hike rates next week at the regular March meeting of its Governing Council to 3pc on March 16. Prof Lane is regarded as among the more dovish ECB figures so any indication he expects rates to rise again will be seen as especially telling.
The central bank’s target is to get inflation back down around 2pc after it spiked to record highs late last year.
Prof Lane said inflation is coming down. A decline in headline inflation means the increase in the cost of living is now lower than expected in the December ECB staff projections, he said.
With less upward pressure on households that should translate into less pressure from workers for wage increases, which is a central factor in the determination of underlying inflation.
However elements of underlying inflation remain high. That includes goods prices which are up despite freeing up of the post Covid bottle necks that affected the supply of many goods. Prof Lane said the current strength of goods inflation suggests that the easing of bottlenecks is not yet feeding through into retail prices.
“While the improvement in supply bottlenecks can be expected to alleviate one source of upward pressure on prices, it is not yet clear whether the upward impact of earlier supply chain problems on final consumer prices has fully played out,” he said.
Food inflation is also high, he said.
“Compared to the peaks during the re-opening phase of last year, the latest observations point to weaker pressures from the energy commodities, non-energy and non-food commodities, global and domestic economic activity and supply side bottlenecks. By contrast, stronger pressures are indicated by the indicators for food-related costs and labour market developments, in particular from the tight labour market and from wage growth.”
The range of factors feeding into inflation means that for the ECB the task of cooling the pressure on households and businesses having to monitor a mix of its forecasts, new data and the mechanisms for monetary policy transmission into the real economy.