NEW YORK (Reuters) – Euro zone inflation is at risk of getting entrenched above 2% so the European Central Bank will keep fighting excessive price growth, even as its policy response is shifting gears, French central bank chief Francois Villeroy de Galhau said.
The ECB has raised rates by a combined 350 basis points since July and more increases are likely as price growth is still too high and underlying price pressures, which filter out volatile food and fuel prices, are still rising.
“We now face the risk of entrenched inflation, which lies in the underlying or ‘core’ component,” Villeroy said in New York on Tuesday. “Inflation has become more widespread, and potentially more persistent.”
But Villeroy said monetary policy was most effective in tackling underlying or core inflation and he expected price growth back at around the ECB’s 2% target by the end of 2024 or the end of 2025.
Although the ECB raised rates by 50 basis points at each of its past three meetings, markets are expecting just a 25 basis point increase on May 4 as smaller steps may be more appropriate as the bank is approaching its peak or terminal rate.
“We at the ECB are now moving from a ‘sprint’ to a ‘long-distance race’,” Villeroy said, adding the inflation outlook, underlying inflation readings and the effectiveness of policy transmission will be the key factors in the next decisions.
Markets see the ECB’s 3% deposit rate peaking around 3.65% by the end of the third quarter, suggesting two 25-basis point moves are fully priced in and investors are split over a third hike.
(Reporting by Balazs Koranyi; Editing by Chris Reese)
