Christine Lagarde and Jerome Powell both agreed interest rates need to go up in the near future.
Central bankers from around the world reiterated the need for higher interest rates. At the European Central Bank annual meeting, taking place in Sintra, Portugal, the hawkish message was loud and clear.
The panel discussion included American Federal Reserve Chairman Jerome Powell, European Central Bank President Christine Lagarde, Bank of England Governor Andrew Bailey, and Bank of Japan Governor Kazuo Ueda.
Everybody, except Ueda, believes interest rates will keep rising to fend off sticky inflation. Ueda’s need for high-interest rates is unjustified given Japan’s low inflation rate.
"I think we have to be as persistent as inflation is persistent,” Lagarde said. “We have to be resolute and decided and determined in reaching the target that we have set and not debate the target as we are running that race."
Inflation in the European Union sits at 6.1%, far from the 2% normal target. Though the Eurozone has already fallen into a technical recession, Lagarde is convinced that raising interest rates further is the way to go.
Inflation is even higher in the United Kingdom, whose economy also stagnated in the first quarter of 2023. At 8.7%, the UK’s inflation is the highest in the G7 and one of the highest of any developed country.
Central bankers also look at core inflation and unemployment to decide on their policies.
Core inflation, a consumer price index without volatile products, remains overall high. On the other hand, unemployment remains low across the developed countries spectrum.
This means that "sticky" inflation remains a problem and the economy is reacting well to rate hikes. For this reason, new hikes will likely come into the future.
American exceptionalism
Fed chairman Jerome Powell also used hawkish tones despite US inflation being lower than other Western countries. In their latest measurement, annual US inflation was 4%, lower than expected.
Indeed, the Fed paused rate hikes, leaving them stable at their June meeting.
The move was necessary to give respite to American banks and businesses, who were starting to suffer from the 13-month long hike cycle.
But the pause is not going to last, Jerome Powell signaled, repeating it in Sitra. Powell said rates “haven’t been restrictive for very long” and that "the bottom line is that policy hasn’t been restrictive enough for long enough".
This means that the Federal Reserve is likely to raise interest rates soon in order to prevent the economy from overheating. The move would be aimed at moderating the current economic expansion and preventing inflation pressures from becoming too large.
