ECB’s Müller: Interest Rates May Have To Remain High for Quite Some Time

3 March 2023

By David Barwick – LJUBLJANA (Econostream) – European Central Bank Governing Council member Madis Müller on Friday suggested that official borrowing costs in the euro area might have to stay elevated for a relatively long time.

In a lecture at Banka Slovenije on inflation differences in the Eurozone, Müller, who heads the Estonian central bank, said that the ECB would have to continue to act ‘until we are confident that inflation will be brought back to its target in a lasting, sustainable manner.’

Noting that the ECB already intended to hike rates this month, he said, ‘It is most likely that this will not be the last rate rise in the cycle and … that interest rates will have to remain high for quite some time.’ Restrictive borrowing costs might be needed for ‘much longer’ to ensure inflation’s retreat, he said.

The focus of central banks had to be on second-round effects, as these could be part of a wage-price spiral that ‘would then stop inflation from falling back to its medium-term target’, he cautioned. However, he said of such a spiral, 'I don’t see that happening right now.'

‘Once the inflation mindset has taken hold, it is very difficult to change’, he said. ‘Businesses and consumers have to have confidence’ that there will be a return to price stability, ‘even if it cannot be achieved overnight.’

Headline inflation was too high, he noted. ‘More worrying, however, is that core inflation has remained persistently high’, he said, ‘as the underlying price pressures are not receding.’ Elevated core inflation ‘indicates the presence of more persistent inflationary forces that can be more difficult to break’, he said.