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Inflation has not peaked and risks rising even higher, says ECB head

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Inflation in the Eurozone has not peaked and risks rising even higher than predicted, the President of the European Central Bank (ECB) warned on Monday. 

Christine Lagarde’s comments hinted at possible interest rate hikes in the future, fuelling speculation that the bank would not take the gentler path to curb inflation. 

Inflation in the 19 countries that use the euro hit a record 10.6% on a yearly basis last month, though economists surveyed by Reuters think it will inch downwards to 10.4% for November. 

The war in Ukraine has driven inflation by causing the cost of energy to spike. Energy price increases are a key source of inflation as they feed into the wider economy, affecting the cost of almost everything. 

Lagarde challenged predictions that the high point of price growth had been reached. 

“We do not see the components or the direction that would lead me to believe that we’ve reached peak inflation and that it’s going to decline in short order,” Lagarde told the European Parliament.

Economists polled by Reuters see Eurozone inflation hitting 8.5% this year, 6.0% next year and 2.3% in 2024 before finally meeting the ECB’s 2% target in 2025.

There have been disagreements between the ECB’s top economists, Isabel Schnabel and Philip Lane, over the outlook for inflation and interest rates, causing confusion among investors about the ECB’s next policy moves.

Uncertainty about whether the ECB will raise rates by 0.5 or 0.75% basis points at its next meeting at the end of the year has caused market volatility. 

Lagarde, who praised Lane and Schnabel’s sparring, said both questions depended on several factors including wages and inflation expectations.

But she added she thought there was “a way to go” with further rate hikes – a phrase also used by Federal Reserve Chair Jerome Powell.

“We clearly have to continue increasing interest rates … and my suspicion, although I do not want to venture too much into the future, is that we still have a way to go,” she said.

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