central banks need to keep rates high for longer

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IMF's Gopinath: Uncertainty means ECB interest rates should remain higher for longer

Major central banks will have to keep interest rates high for much longer than some investors expect, Gita Gopinath, first deputy managing director of the International Monetary Fund, told CNBC on Tuesday.

“We must also recognize that the central banks have done a little … Forum in Sintra, Portugal.

“Now this is unlike, for example, what many markets are expecting, which is that things are going to come down very quickly in terms of rates. I think they have to be kept much longer,” she said.

The ECB started raising rates in July 2022 and has increased its key rate from -0.5% to 3.5% since then. The US Federal Reserve, meanwhile, began a hiking cycle in March 2022 but chose to stop this month, moving out of Europe. Nevertheless, Fed Chairman Jerome Powell has suggested that there could be at least two rate increases this year.

A survey of US economists at the end of May showed that they had pushed back their expectations for the Fed to cut rates from the last quarter of this year to the first quarter of 2024. In a note to clients On Friday, Nomura said he expects both the ECB and the Bank of England to announce rate cuts in about a year.

However, for the IMF it is clear that reducing inflation must be an absolute priority.

Gita Gopinath, the first deputy managing director of the International Monetary Fund (IMF), spoke to CNBC at the ECB Forum in Portugal.

Bloomberg | Bloomberg | Getty Images

“Inflation is taking too long to return to target which means central banks need to be committed to fighting inflation even if that means weaker growth or a lot more cooling in the job market,” said Gopinath.

As for the ECB, the central bank raised its expectations for inflation in the euro zone at its last meeting in June. It now expects headline inflation at 5.4% this year, at 3% in 2024 and at 2.2% in 2025.

Gopinath described the current macroeconomic picture as “very uncertain.”

Speaking to CNBC’s “Street Signs Europe” on Tuesday, Frederik Ducrozet, head of macroeconomic research, said
at Pictet Wealth Management, that it is simply a result of not knowing “when enough is enough” when it comes to rate hikes.

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