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ECB set to raise rates again in May, policymakers say

The European Central Bank is likely to raise interest rates again in May after an already signalled hike in March, two policymakers said on Friday, with one arguing that the peak or “terminal” rate is at least starting to appear on the horizon.

The ECB raised rates by a half a percentage point to 2.5% on Thursday and promised a similar move in March but kept its options open about subsequent steps, raising doubts among investors about its resolve to keep raising rates to tame inflation.

But Slovakia’s Peter Kazimir and Lithuania’s Gediminas Šimkus said that March would not be the end of policy tightening because inflation was still far too high, even if there had been an improvement recently.

“The March increase will not be the last,” Kazimir said in a statement. “We will decide how many more will be needed later.”

Simkus said the May increase could be either 25 or 50 basis points but a step up to 75 bps was unlikely.

They were confirming what sources had told Reuters after the meeting on Thursday.

While neither would specify where rate hikes could end, Simkus said the ECB could be approaching a peak.

“I see positive trends for inflation,” Simkus said. “I think that we are already moving towards that terminal rate.”

Indeed, analysts polled by the ECB expect the euro zone central bank to eventually conquer inflation – but not for another two years.

Markets currently price the terminal rate at 3.35%, suggesting that some investors see just a 25-bp move after the already signalled March move, while others see 50.

Both Kazimir and Simkus pushed back on the idea that rates could be cut towards the end of the year, as currently priced by markets.

But Simkus acknowledged that a cut in 2024 is possible if a disinflationary trend, whereby prices rise more slowly, becomes prominent.

This may be starting to happen. Companies surveyed by the central bank were planning to raise prices at a slower pace and with less conviction.
Source: Reuters

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