Lagarde: ECB will need to continue hiking cycle

To help control stubbornly high inflation, the European Central Bank will need to extend its cycle of interest rate hikes, according to ECB President Christine Lagarde on Thursday.

Lagarde said in a speech in Germany that the bank must continue to raise borrowing costs to “sufficiently restrictive levels,” citing a previous comment that “inflation is too high and is set to remain so for too long.”

Although she admitted that the rise in interest rates is causing a tightening of bank lending conditions, she noted that it is unclear “how much stronger the transmission of ECB policy will be.” As a result, Lagarde said that the ECB’s exceptional rate hike campaign must continue until policymakers are sure that inflation is on course to reach 2% medium-term target.

Some analysts believe the ECB may boost its deposit rate to as high as 3.75% by July, matching an all-time high hit in 2001.

The remarks follow preliminary data showing that the Eurozone’s consumer price index increased by less than expected on an annual basis in May. The core figure, which excludes volatile commodities such as food and energy and is carefully watched by the ECB, also climbed at a slower rate than many experts projected.

The ECB estimated that annual average headline inflation would not fall below 2% until the second half of 2025 at its most recent meeting, when rates were hiked by a quarter percentage point. However, Lagarde stated that the bank cannot yet tell if it is insolvent.