Consumer Price Growth Nearing Peak, Further Interest Rate Hikes Expected

Consumer price growth has very likely approached its peak, stated the chief economist of the European Central Bank Philip Lane, also acknowledging that borrowing costs could rise again.

‒ It is probably too early to judge whether inflation is rising, but I would be quite confident in saying that we are likely close to the peak of inflation ‒ Lane told Milano Finanza in an interview published on Tuesday. He also emphasized that it is uncertain whether this is already the peak or if it will arrive in early 2023.

A week and a half before the European Central Bank sets interest rates again, officials hint that banks may slow their recent pace of increases. The governor of the Irish central bank Gabriel Makhlouf said on Monday that a half-point shift, following consecutive increases of 75 basis points, is the most likely outcome.

‒ We expect that further rate increases will be necessary, but we have already achieved a lot ‒ Lane said, emphasizing that the starting point is now different, given the previous rate hikes of 200 basis points.

Regarding consumer prices, the ECB’s chief economist said he cannot ‘rule out an increase in inflation at the beginning of next year’.

‒ After we pass the first months of 2023, we should see a significant decline in the inflation rate in spring or summer. However, it will take time to move from the current very high levels to the targeted two percent ‒ predicted the ECB’s chief economist.

When asked if the inflation rate could fall to six or seven percent next year, he said that the initial reduction of the current high rates would be roughly at that level, followed by further reductions.

Still, ‘we think there will be a second round of inflation,’ Lane said, citing larger wage increases than usual over the next three years.

‒ Therefore, it will take some time to return to our target of 2 percent. Thus, the effects of the second round will drive inflation next year as well as those thereafter ‒ he stated.

Tightening in Other Parts of the World

While waiting to see what will happen in Europe, the Australian central bank raised its key interest rate for the eighth consecutive month and announced a tightening of monetary policy. All in an effort to ‘cool down’ the highest inflation on the continent in the last three decades.

The bank raised its rate by a quarter of a percentage point to the current 3.1 percent. This is their strongest annual tightening since 1989.

‒ The board expects further increases in interest rates in the coming period ‒ said the governor of the Australian central bank RBA, Philip Lowe, in his statement after the meeting.

Australia was the first to attempt to slow the pace of interest rate hikes as it sought to protect economic growth while trying to curb inflation, which is projected to reach eight percent by the end of the current quarter.

While Australia wanted to slow down, New Zealand and the US are tightening their measures, signaling their determination to slow consumer prices regardless of the cost their economies will have to bear.

The Reserve Bank of New Zealand predicted a terminal rate of 5.5 percent next year, and the Fed is expected to continue tightening as well. Some economists believe that the RBA will have to implement much more tightening than currently anticipated given the wave of inflation that has hit the world.