Central banks around the world are combatting record inflation, with the European Central Bank (ECB) announcing an unprecedented 75-basis-point (bp) interest rate hike last week, before its president confirmed several more increases are expected.
Much like the Reserve Bank (RBA) governor, ECB president, Christine Lagarde, indicated that inflation remains “far too high”.
Speaking at a press conference last week, she said “two, three or four” more rate hikes would likely be needed to help bring inflation back to target.
Ms Lagarde was a lot more specific than governor Philip Lowe who last week confirmed increases would continue, but failed to specify how high he expected rates to go and at what pace.
Addressing the ECB’s record rate lift, Ms Lagarde said: “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target.”
“Based on our current assessment, over the next several meetings, we expect to raise interest rates further to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”
Annual inflation in the Eurozone was estimated by Eurostat to be 9.1 per cent in August and the ECB noted that inflation was still being driven up by soaring energy and food prices, demand pressures in certain sectors and supply bottlenecks.
The central bank has significantly revised up its forecasts for inflation with an average increase of 8.1 per cent expected over 2022, 5.5 per cent over 2023 and 2.3 per cent over 2024.
Fed chairman reiterates hawkish stance
The messaging is much the same out of the United States, where after delivering multiple rate hikes in recent months — including two consecutive lifts of 75 bps — Federal Reserve chairman, Jerome Powell, vowed to continue to battle inflation.
“History cautions strongly against prematurely loosening policy,” Mr Powell said in response to a question at the Cato Institute last week.
“I can assure you that my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”
With the Fed due to hand down its next interest rate decision on 21 September, Mr Powell stressed that the central bank needed to act “forthrightly, strongly, as we have been doing”.
The Fed chairman also made reference to the strength of the demand in the US labour market and noted that wages were running at elevated levels.
According to analysts at ANZ, the current market expectation is for another 75-bp lift by the ECB in October and a similar move by the Fed this month.
Expectations are, however, mixed among economists, with some expecting the RBA to lift the cash rate by another 50 bps in October, while others believe the time has come for the central bank to lift its foot off the gas.
Dr Lowe explained last Thursday that the bank, much like its counterparts globally, is simply reacting to an “unexpected” surge in inflation, which he partially blamed on Russia’s invasion of Ukraine and various problems in the production of energy around the world.
