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Central banks warn that high rates will stay.

 

Central Bank

Investors have been put on notice that cent­ral bankers on both sides of the Atlantic will «stay the course» on interest rate increases to cool their eco­nom­ies and tame high infla­tion.

European Cent­ral Bank pres­id­ent Christine Lagarde warned that fur­ther significant rate rises lay ahead in com­ments later echoed by a top offi­cial at the US Fed­eral Reserve.

«We shall stay the course until . . . we can return infla­tion to 2 per cent in a timely man­ner,» the ECB pres­id­ent said dur­ing a panel dis­cus­sion dur­ing the World Eco­nomic Forum in Davos.

Lael Brainard, the vice-chair of the Fed­eral Reserve, sig­nalled that the US cent­ral bank also had more to do to get infla­tion closer to 2 per cent, des­pite signs that con­sumer spend­ing was start­ing to ebb, the labour mar­ket was cool­ing, and price pres­sures had eased.

Most offi­cials have sig­nalled their sup­port for the US cent­ral bank to shift from half-point increases down to quarter-points, in con­trast with expect­a­tions for the ECB. As a result, they now expect the US fed­eral funds rate to peak at between 5 per cent and 5.25 per cent, sug­gest­ing two more quarter-point rate rises after Feb­ru­ary's move.

The ECB raised interest rates by 2.5 per­cent­age points last year to com­bat a surge in prices when infla­tion hit an all­time high of 10.6 per cent in Octo­ber.

Lagarde added that head­line, core and all other meas­ures of infla­tion were still a con­cern at Europe's cent­ral bank in Frank­furt. «Infla­tion, by all accounts, is way too high,» she said.

«I actu­ally think rates are prob­ably going to go higher than 5 per cent . . . because I think there's a lot of under­ly­ing infla­tion, which won't go away so quickly,» Dimon of JP Morgan told CNBC at the World Eco­nomic Forum in Davos.

In sep­ar­ate remarks last week, Dimon said the fed­eral funds' rate might even need to rise to 6 per cent. His con­cern is that some of the drivers that have helped to bring infla­tion down recently, includ­ing lower energy prices and slow growth across China owing to Covid lock­downs, may be tem­por­ary.

By con­trast, Gor­man of Morgan Stanley told CNBC that infla­tion had «clearly» peaked and that rates hit­ting 6 per cent would be «sur­pris­ing». He pre­dicted a scen­ario where the Fed would lift rates by 25 basis points at its next two meet­ings and then pause to assess the impact of tighter mon­et­ary policy on the eco­nomy.

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