Central bankers across the world have raised interest rates rapidly to their highest levels in more than a decade to stamp out inflation, but said they can’t tell whether they have done enough.
Federal Reserve Chair Jerome Powell and the leaders of three other major central banks are set to speak on those challenges Wednesday morning during the European Central Bank’s annual policy symposium in Sintra, Portugal.
Powell said last week the Fed didn’t raise interest rates earlier this month because it wanted to slow its increases, but he stressed the U.S. central bank would likely lift borrowing costs again as soon as next month.
The Fed’s decision to hold rates steady, after 10 consecutive increases, was designed “to give ourselves more time—to stretch out the time for making these decisions,” Powell said.
Inflation and economic activity across the world’s affluent economies haven’t slowed this year as much as many officials anticipated, creating more uncertainty about how high they might lift rates.
At their policy meeting this month, Fed officials left the benchmark federal-funds rate in a range between 5% and 5.25%. Another increase at the Fed’s July 25-26 meeting would take it to a 22-year high. Most officials projected two more increases this year.
Fed officials see a risk that their past rate increases, together with recent banking-industry stresses, will eventually create a sharper-than-anticipated slowdown. They are trying to balance that against the risk that the economy proves more resilient than expected and inflation stays too high, requiring them to lift rates higher than they would otherwise.
The ECB this month lifted rates by a quarter percentage point, and its president, Christine Lagarde, said at the symposium on Tuesday that another increase was likely in July. The central bank has raised its policy rate to 3.5% this month from minus 0.5% one year ago.
Lagarde warned that sluggish productivity risked higher wage costs for businesses that would be passed along to consumers, which would cause the ECB to raise rates to higher levels and hold them there for longer.
“It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached,” Lagarde said.
Overall inflation has slowed this year because of falling energy and commodity prices that surged when Russia invaded Ukraine 15 months ago. But central bankers worry because core inflation, which excludes volatile food and energy prices and is deemed a more reliable gauge of future inflation, hasn’t slowed much.
Last week, the Bank of England raised its key interest rate by a half percentage point, a more aggressive rate rise than its peers as it seeks to curb the highest inflation rate in the Group of Seven wealthy countries.
U.K. consumer prices in May were 8.7% higher than a year earlier, unchanged from April. Before the inflation data was released last week, economists and investors had expected a quarter-point interest-rate increase from the BOE.
“Inflation is still too high and we’ve got to deal with it,” said BOE Gov. Andrew Bailey last week. “We know this is hard. But if we don’t raise rates now, it could be worse later.”