The ECB may need to take interest rates above 3.75% if it is to bring inflation back to its target in a timely manner, amid “accelerating” wage rises, an IMF official said Friday, although acknowlwdging fiscal consolidation could shave up to 50bps off the top rate over the next two years.

Euro area rates “still have some way to go," from their present level of 3.25%, European Department Director Alfred Kammer said in a speech. Even allowing for two more 25bps hikes, inflation is currently only seen hitting 2% in mid-2025, a period Kammer described as “too long." (see MNI SOURCES: Most At ECB See 4% Rate As Only Outside Chance).

“A more restrictive stance, maintained over a sustained period, would ensure that inflation expectations stay anchored, and inflation returns to target in a timely manner. Monetary policy of course has to continue to follow a data-dependent approach,” he said (see MNI INTERVIEW: Higher ECB Peak Rate Means Faster To Cut-Simkus).

"New IMF research shows that if all countries in the euro area would consolidate by an additional 1 percent of GDP in 2023 and 2024 and ½ percent of GDP in 2025, the ECB’s policy rate could be 30-50 bps lower while achieving the same inflation outcome."