March rate increase of 50 basis points 'very likely' to curb inflation, ECB chief says

Europe's core inflation, which excludes food and energy prices, rose in February

Christine Lagarde, European Central Bank President, said uncertainty remained in the eurozone. AFP
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The European Central Bank will “very likely” raise interest rates by 50 basis points (bps) in March to tame persistent inflation in the eurozone, its president has said.

“This was a decision that was indicated at our last monetary policy meeting and all the numbers we have been seeing in recent days are confirming that this interest rate hike is very, very likely,” Christine Lagarde said in an interview with Spanish newspaper El Correo.

According to the EU's statistics agency, annual inflation in the 20 countries that use the euro decreased to 8.5 per cent in February from 8.6 per cent in the previous month.

But core inflation, which excludes the food and energy sectors, rose to 5.6 per cent last month from 5.3 per cent in January, the data showed.

“Headline inflation has gone down in recent months and will continue to decline in the next few months. Core inflation ... is too high,” said Ms Lagarde.

The ECB will return to its target of 2 per cent inflation in a “timely manner”, she said.

The central bank, which raised its key rate by 50bps to 2.5 per cent last month, is set to hold its next monetary meeting on March 16.

A fall in headline inflation was due largely to a drop in energy prices.

Dutch Title Transfer Facility gas futures, the benchmark European contract, was last trading at €44.98 ($47.91) per megawatt hour on Friday.

Futures hit a record high of about €343 a megawatt hour in August as Russia reduced its gas exports to Europe in response to wide-ranging economic sanctions.

Greater storage capacities and an unusually warm winter have contributed to a sharp fall in gas prices over the past few months.

“I am confident that headline inflation will go down in 2023, while core inflation will be stickier in the near term,” said Ms Lagarde. "And I expect somewhat better economic growth compared with the stagnation in the last quarter of 2022.

“But it’s true there is huge uncertainty. A little more than a year ago, we could never have imagined that there would be a war right on Europe’s doorstep. What will happen over the coming months is uncertain.”

The eurozone is forecast to grow 0.7 per cent this year, after a 3.5 per cent expansion last year and 5.2 per cent growth in 2021, the International Monetary Fund said.

Germany, Europe's largest economy, is set to grow by 0.1 per cent this year. Its economy grew by 1.9 per cent in 2022 and 2.6 per cent in 2021.

France, the eurozone's second-largest economy, is forecast to grow 0.7 per cent this year, after a 2.6 per cent expansion last year and growth of 6.8 per cent in 2021.

“We don’t want to break the economy; that’s not our goal,” said Ms Lagarde.

“Our goal is to tame inflation and as a central bank, interest rate hikes are our main tool to achieve that.”

For the moment, "the economy is resilient, employment is robust and unemployment is the lowest it has ever been", she added.

Updated: March 05, 2023, 10:19 AM