ECB hikes rates to 2.5%

Luke Wilson (0:00)

Europe's Central Bank raises interest rates as inflation keeps climbing. It's World Business Express from the BBC World Service. I'm Luke Wilson. Oil hits $105 a barrel with jet fuel costs in some parts of the world pushed even higher. And the Chinese telecoms giant Huawei goes on trial in New York.

The European Central Bank has increased interest rates to 2.5 per cent, the second time it's raised rates this year, and says inflation is set to remain well above its 2 per cent target for an extended period. Christine Lagarde is the bank's president.

Christine Lagarde (0:40)

The outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.

Luke Wilson (0:50)

Catherine Nice is the deputy head of Global Economics at PGM Credit, one of the world's largest bond managers, and she says we can expect similar messages from other central bankers.

Catherine Nice (0:59)

I think President Lagarde was quite open about where next for interest rates. She sounded very much concerned about upside risks to inflation. But having said that, she didn't sort of double down on what I would call a very hawkish message.

And the second thing is that the ECB now really see greater resilience in the euro area economy, not just over the recent past, but also as an expectation going forward. And that's quite important because that would suggest that perhaps the euro area economy can actually tolerate somewhat higher interest rates.

Luke Wilson (1:47)

And do you think we'll see other central banks follow suit?

Catherine Nice (1:51)

I do expect that we will hear more robust messaging from the other central banks that we get next week. That is the Bank of England. We're already getting hints of that from comments that we've heard from Governor Bailey at the Bank of England. And of course, one would expect the US Federal Reserve to give a similar kind of messaging.

Luke Wilson (2:17)

Tom Cleary owns several bars and hotels in Dublin, including the city's famous Temple Bar. Inflation in Ireland is currently 3.7 percent. And Tom told me he's definitely feeling the effects.

Tom Cleary (2:29)

Well, the problem then is it knocks on to everything. Like rent goes up for my staff. I employ nearly 200 staff. So they all have rent problems, which means they need more wages. And if I have to pay them more wages, I have to try and recover that somewhere. And I can either try and recover that with higher prices, which doesn't always work, or in other ways, cut service and cut standards, which is not good in long term for business like mine either. If you cut standards and service in a high-end restaurant, you'll end up with no customers after a while because they want the high-end food and service. But that comes at a cost.

Luke Wilson (2:59)

And interest rates going up hopefully will bring down inflation, but it could also slow down the economy. Do you worry about that as a hospitality business? Well, I do.

Tom Cleary (3:09)

Yeah. I don't like higher interest rates because it has such a knock on effect of everybody. People's mortgages, business people like myself. When mortgages go up, rents go up. And that's a huge consideration. My business is in the city center, and rents in the city center because there's so many hotels and Airbnb apartments now. It's very hard to find even at a high price.

Luke Wilson (3:27)

And one of the drivers of inflation the European Central Bank is talking about is energy costs, really high energy inflation. Are you seeing that with your business, Tom? Yeah, we are.

Tom Cleary (3:36)

Yeah. Our trade association, which represents bars and hotels throughout Dublin, is fighting that hard and we're trying to kind of be a collective and trying to negotiate then a reduction for everybody with that, which works with some of them, but doesn't work with everybody.

Luke Wilson (3:51)

Tom, clearly there. Nicholas Hyatt is lead alternatives analyst at Hargreaves Lansdowne. And Nicholas, Catherine mentioned about the Fed meeting next week. We'll get US consumer price inflation tomorrow, but we've had producer prices this afternoon. What does it tell us?

The producer prices came in a little bit higher than expected at 5.4 percent, but that's actually up quite a lot month on month. And that's mostly down to higher energy prices. Now, central banks generally try and look through things like higher energy prices because they can spike up one month and fall away the next. But if, as we've been hearing, energy prices stay higher for longer, then that inflation starts to feed through to other parts of the economy. And then central banks do have to take notice. I don't think it changes the Fed's decision next week, but it's definitely something they'll be watching. Nicholas Hyatt from Hargreaves Lansdowne, thank you.