Brace Yourself: Expect More Rate Hikes as Core Inflation Reaches Alarming Heights!

The European Central Bank (ECB) will continue to raise interest rates as the underlying inflation rate remains too high, according to Klaas Knot, a member of the Governing Council. In an interview, Knot stated that the ECB will have to increase borrowing costs “as long as the underlying inflation hasn’t been tamped down,” and that “our real problem at the moment is that core inflation is still too high.” The central bank recently raised the deposit rate by a quarter-point to 3.25%, following three double-sized moves. ECB President Christine Lagarde also indicated that more interest rate hikes are likely to come. She said, “We have more ground to cover, and we are not pausing.”

In April, Eurozone consumer prices, excluding volatile items like fuel and food, increased by 5.6% from a year ago, which is a slight decrease from March’s record 5.7%. Knot, who is one of the region’s more hawkish officials, believes the ECB may reach its 2% inflation goal “sometime in 2025.” However, he added that the central bank’s policy works with some delays, so the biggest impacts of what has been done so far are still in the pipeline. Knot stated that the ECB has deemed it somewhat responsible to take a step back from half a percentage point to a quarter percentage point per meeting.

Since the ECB began raising rates last summer, the tracker household is now paying around €480 more in mortgage payments a month, according to Stephen Hamilton, the managing director of MortgageLine. He stated that hopefully, for mortgage customers, the increases are nearing the end. “Inflation still a problem, but the rate of increase is falling,” he said. Mr Hamilton expects “some if not all” banks to announce increases this month for fixed rates, which will kick in sometime in June for new mortgages that are drawn down.

During the press conference following the latest interest rate hike, Lagarde stated that underlying price pressures, despite easing in recent times, remained strong. Across the Eurozone, food price inflation was running at around 13%.