Introduction

European Central Bank President Christine Lagarde said on Monday there were “signs of a slowdown” in core inflation in the eurozone, but it was too early to announce that this key indicator of price increases had peaked.

Market Expectations for Further Interest Rate Hikes

Lagarde’s remarks are likely to reinforce market expectations for further interest rate hikes this month and next, despite last month’s sharp decline in inflation.

Core Inflation Pressures Remain High

“The latest data available indicates that core inflation pressures remain high and while some of them appear to be declining, there is no clear evidence that core inflation has yet to peak,” Lagarde told European lawmakers.

Inflation in the Eurozone 20

Inflation in the eurozone 20 eased to 6.1% in May from 7.0% in April, while core inflation, which excludes food and fuel price volatility and is closely monitored by the European Central Bank, rose to 5.3% compared to 5.6%.

Controversy Over Further Interest Rate Hikes

This sparked controversy over the need to further raise interest rates in light of expectations that the Bank will raise them at its next meeting on 15 June, likely to reach a total of four percentage points in less than 12 months, an unprecedented level.

Effects of Past Interest Rate Hikes

Lagarde acknowledged that the effects of past interest rate hikes are “starting to materialize” and are “likely to intensify in the coming years.”

ECB’s Approach to Interest Rates

But she reiterated the ECB’s approach that interest rates should be raised again “to levels that are sufficiently restrictive” to bring inflation down to the bank’s 2% target, and that they “will be maintained at those levels for as long as necessary.”