MNI INTERVIEW: Higher ECB Peak Rate Means Faster To Cut-Simkus

The European Central Bank is set to hike by another 25 basis points from 3.25% in June and the deposit rate is likely to peak at 3.75% or slightly higher, Lithuanian central bank chief Gediminas Simkus told MNI, adding that the higher the peak the quicker rates will also be able to come down.

“I do not think that hike in June will be the last one,” he said in an interview, adding, “There are four months and two forecasts before the middle of September. I’m not sure if 3.75% is the peak, but in any case I don’t think we would go much above 3.75% if so, at least from the data I have at the moment.”

ECB rates are already in restrictive territory, with monetary policy making an impact largely through financial conditions for the the moment, and set to kick in through other macroeconomic channels as well, but inflationary pressures remain strong despite the ECB’s determination to reach its 2% target, Simkus said.

“So [a] hike in September or October might happen and might not at the same time, it will depend on data,” he said.

According to the ECB's latest Economic Bulletin, published on Friday, policymakers were briefed at the May meeting that much of the tightening impact from previous hikes would happen between now and mid-2024.

PEAK RATE

Overnight index swaps currently imply an ECB peak rate just below 3.7% by around September,

“How quickly we decrease the interest rate depends on where we will stop hikes. We are data-dependent, so we don’t have a terminal rate as such in mind," he said, adding "We are still in the process of hiking rates, so I don’t think about when we are going to start decreasing." (See MNI INTERVIEW: ECB To Hike To 4% - Ex-Bank Of France Economist)

Whilst the ECB’s March survey showed consumers’ inflation expectations picking up, Simkus noted that market-based expectations showed another picture.

“People make judgements about inflation from food, energy and services, so I’m not surprised,” he said. “ But this shows how important timely decision-making to restrain inflation is. Market-based inflation expectations are also important, and they are not detached from 2% over the medium-term.”