ECB interest rate is heading towards 4pc by May and don’t expect it to fall back soon

The ECB intends to raise its main borrowing rate again, to 3.5pc, at its next meeting on March 16 barring "extreme" events.

Thursday’s increase has already taken it to 3pc, having been less than zero last July. An increase on the cards for May is set to add another quarter or half of one percent.

Further hikes are in store if core inflation – minus energy, food and alcohol prices – does not come down from the record high of 5.2pc it reached in December and which stuck in January.

“I’m not suggesting it will be [a] steady pace [of hikes] for an ongoing basis,” Ms Lagarde said. “It might be 50 [basis points], it might be 25, it might be whatever is needed.”

And “that will not be enough” she said. “We will have to stay there.”

But experts warn the ECB may be chasing inflation at the risk of the economy.

“If the ECB raises rates aggressively further, it is unlikely to substantively alter the path of inflation but it could trigger more problematic developments in relation to economic activity and/or financial stability,” said economist Austin Hughes.

Bank lending is already feeling the pinch, Ms Lagarde admitted, with tighter lending terms and lower loan demand proof that there was “good transmission” of its rate hikes through the economy.

Eurozone growth was positive in the last three months of 2022, a surprise on the upside that was due in part to Ireland’s outperformance.

Price hikes have also slowed, although food inflation is on the rise and core inflation is sticky.

“The banshee of Irish folklore wails to warn of impending disaster,” Mr Hughes said. “For much of the past year, that disaster was judged to be runaway inflation. That risk now looks overdone.”

Irish banks, after holding out for a time following the ECB’s first rate hike last July, have started to pass on those rises.

AIB announced a 0.35pc hike for all variable mortgage customers – the first of the three main lenders to do so – effective from mid-March.

It has also raised rates for tracker and fixed-rate borrowers.

But the lender said it would reward personal and business savers with a rise in
deposit rates after the ECB raised its main deposit rate to 2.5pc.

Bank of Ireland said it would “keep all rates under ongoing review” after confirming those on tracker mortgages would pay more from February 22.

Industry group Brokers Ireland criticised the ECB for not saying where and when rate hikes were “going to end”.

Five successive hikes have added up to €400 a month to a €330,000 mortgage, the group estimates, with a further rise in March to add a further €88.

“The main thing mortgage holders and those aspiring to get a mortgage need to do is to concentrate on getting the best interest rate they can secure, especially while there are still reasonable rates available in the market,” said Rachel McGovern, director of financial services at Brokers Ireland.

Carsten Brzeski, ING Bank’s global head of macro, also called out Ms Lagarde for bringing “more fog than clarity” to the ECB’s hiking path, despite her attempts to shut down criticism by insisting the bank’s determination to drive down inflation to 2pc “should not be doubted”.

He said the ECB is likely to “continue hiking into late spring but also to keep interest rates high for longer than markets have currently pencilled in”.

Aside from core inflation data, the ECB is also looking at how governments react to ongoing cost-of-living pressures, urging states to roll back stimulus measures as inflation abates.

It was a message Ms Lagarde said she conveyed to Eurogroup president Paschal Donohoe, who joined ECB governors for dinner on Wednesday night.

While she talked of “disinflationary forces” – lower energy prices and dampened consumer demand – she also said prices could spike higher due to government stimulus measures and China’s post-Covid reopening.

The ECB’s rate hike came the same day as the Bank of England raised rates by half a point to 4pc, its tenth increase in a row, with governor Andrew Bailey saying it was “too soon to declare victory” over high inflation.

The US Federal Reserve also raised its main lending rate by a quarter point this week – to 4.5pc-4.75pc – with chair Jerome Powell talking of a “disinflationary process” under way and saying he saw a “path” to bringing inflation back to target.

The ECB has not attained the same level of clarity. Next month, it will have to tame not only inflation but an increasingly hawkish wing determined to keep rates in “restrictive” territory.