Lagarde signals interest rates may need to rise to new EU record

CHRISTINE LAGARDE has signalled that interest rates in the eurozone will have to rise towards record highs to stop the economy from overheating as she warned that the fight against inflation was far from over.

The president of the European Central Bank (ECB) warned policymakers had “more ground to cover” to keep a lid on price rises, which rose at an annual pace of 7pc in the year to April.

“We are not pausing, that is very clear,” she told reporters after the ECB lifted all three of its key interest rates by 0.25 percentage points, taking the deposit rate to a 15-year high of 3.25pc.

In a clear departure from the US Federal Reserve, Ms Lagarde indicated interest rates may be pushed to their record highs of 3.75pc last seen in 2000 as she said monetary policy needs to be “sufficiently restrictive” to bring inflation down to the ECB’S 2pc target.

She added that some policymakers called for an even bigger hike of 0.5 percentage points this month, adding “the eurozone is not there yet”.

It came as a series of UK data suggested the Bank of England may have to keep raising interest rates towards 5pc in order to keep a lid on inflation.

A Bank survey suggested UK executives were starting to doubt the Bank’s ability to keep driving down inflation towards its 2pc target. The survey showed that expectations for yearahead price rises rose from 5.3pc in March to 5.9pc in April as the headline rate continues to remain above 10pc.

A closely-watched gauge of private sector activity rose to a 12-month high amid increasing evidence that demands for higher wages are pushing up business costs and helping to drive up prices. The S&P Global UK services Purchasing Managers’ Index jumped to 55.9 in April, up from 52.9 in March, with the level well above the 50 mark that divides growth from contraction.

Tim Moore, economics director at S&P Global, said: “Strong growth in spending on travel, tourism and leisure was a tailwind for the service economy in April, alongside a sustained recovery in international visitors.”

Citi analysts said the data would cause “additional concern” in Threadneedle Street that higher rates are “not yet having the desired effect”. Andrew Bailey, the Bank’s governor, signalled in February that rate rises were probably coming to an end. The Bank is expected to increase rates for the 12th straight time to 4.5pc next week.