Central bank chiefs warn interest rates will keep rising

The world’s top central bank chiefs signalled their readiness to increase interest rates further and keep them high, as they warned tight labour markets are still pushing up wages and prices.

The heads of the US Federal Reserve, the European Central Bank and the Bank of England warned at a conference in Sintra, Portugal, that more action may be needed to bring inflation down towards targets of about 2 per cent despite some economists’ predictions that further rate rises could trigger a recession or financial crisis.

“Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” Fed chair Jay Powell told the much-watched central bankers’ conference.

“The labour market is really pulling the economy,” he added, signalling the Fed could increase interest rates at its next two meetings after pausing this month.

The futures market was pricing in a 79 per cent probability of a July rate rise by the US central bank, up from 74 per cent before Powell spoke.

Frederik Ducrozet, an economist at Pictet Wealth Management, said the bankers “seem ready to tolerate a mild recession if that’s the price to pay” to hit their targets.

However, IMF deputy director Gita Gopinath warned the conference that central banks may need to sacrifice their fight against inflation if higher rates triggered a systemic financial crisis.

Investors expect the Fed, the ECB and the Bank of England to increase their policy rates a couple more times in the coming months, particularly as economic growth has remained relatively resilient, labour markets are still very tight and wages are rising rapidly.

Inflation has been falling in the US and in the eurozone, but excluding energy and food prices it has been slower to decline. Powell said that while goods and housing prices had fallen, the Fed still had not seen “any real improvement” in the labour-intensive services sector.

The Fed chair added he still did not think a recession would be required to bring labour supply and demand into balance.

“Wage pressures are still high but they are definitely coming down,” he said, noting there were still 1.7 vacancies for every unemployed person in the US.

BoE governor Andrew Bailey said there could be “very big jumps down” in headline inflation in the coming months. But he added the core inflation rate — excluding energy and food — was “much stickier” and the UK’s shrunken labour force due to people stopping working since the coronavirus pandemic meant high wage growth could keep price pressures elevated.

Even Bank of Japan governor Kazuo Ueda said the growth of wages and prices were picking up in his country, after decades of near stagnation, allowing officials to start considering the prospect of abandoning its ultra-loose monetary policy.

“Wages have started to rise at 2 per cent or so for the first time in more than three decades — we are starting to see changes in inflation expectations and changes in wage-setting behaviour,” said Ueda, who took charge of the BoJ earlier this year. “This is a good sign.”

Christine Lagarde, president of the ECB, which hosted the conference, said her institution was “not seeing enough tangible evidence of underlying inflation — particularly domestic prices — stabilising and moving down”.

Eurozone inflation is 6.1 per cent, compared with 4 per cent in the US and 8.7 per cent in the UK.