The European Central Bank will have to raise interest rates several more times to tame price pressures, even if headline inflation is now close to its peak, ECB chief economist Philip Lane told Italy's Milano Finanza newspaper today.
"We do expect that more rate increases will be necessary, but a lot has been done already," the paper quoted Professor Lane as saying today.
"I would be reasonably confident in saying that it is likely we are close to peak inflation," he said.
Having raised rates by a combined 200 basis points (bps) since July to fight off record high inflation, the ECB has signalled a slowdown in the pace of monetary tightening this month after back-to-back 75 bps point moves.
This points to a 50-bps hike in the ECB's 1.5% deposit rate on December 15 before a string of further moves in 2023 that could carry the deposit rate to the vicinity of 3%.
Philip Lane did not explicitly endorse a 50 bps move over a bigger increase but repeated his case for a slowdown.
"We should take into account the scale of what we have already done," said Lane, who makes policy proposals for the rate-setting Governing Council. "So the basis for the decision will be different."
At 10%, inflation may have already peaked but its decline will be slow over the coming months and upticks in early 2023 are still a possibility.
"Given the significant increase in natural gas prices, I don't rule out some extra inflation early next year," Lane said. "The journey of inflation from the current very high levels back to 2% will take time."
More worrying for policymakers, underlying price growth, which filters out volatile energy and food prices, could still accelerate from its latest 5% reading, and could take even longer to decline.
This is due to past energy price increases, which are still filtering into other sectors, particularly services.
Interest rates set to reach their peak next year
Interest rates will continue to rise in the coming months but are likely to plateau next year, according to John Finn, managing director at Treasury Solutions.
"The good news is for people, finally, is that we'll see them hit the top in 2023," said Mr Finn, who was speaking on RTÉ's Morning Ireland. "Maybe between 3% and 3.25%, I think, would be the peak - and I would expect to see that maybe in the first half [of the year]."
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He said that rates were likely to hold at that level for some time. However consumers and SMEs will at least have some reassurance that the phase of rapid rate increases was over.
"They may not come down very quickly, but from a borrower perspective at least it means we should the peak next year and not getting any worse," he said.
However he warned of a tightening in financial services next year, as banks become more cautious in the face of a slowing economy.
He said this would not be nearly as acute as the problems faced in the financial crisis, but it would create challenges for households and businesses nonetheless.
"The level of debt that corporates have, SMEs and others, is about a quarter of what it was in 2008 and the banks are better capitalised," he said. "If you do get a slowdown you will see things tighten a little bit.
"[Banks] will take longer to assess credit applications, you'll have to do your homework a little better, and they'll probably not lend as much in terms of a multiple of profits," he said. "The advice to SMEs in that space is to be prepared and do your homework well."
Another challenge complicating factors is the reduction in competition in the market in recent years, particularly in banking.
Mr Finn said that non-bank lenders were filling some of the gap left by traditional firms - while there was also a home that Permanent TSB would become a real third force in the market. However he said it was also a reality that fewer players could mean weaker competition on the price and terms offered to customers.
He also said that consumers and SMEs needed to adjust to the changing circumstances, as it marked a return to 'normal' after a decade of extremely unusual financial conditions.
"What we had in the last 10-12 years was abnormal - I wouldn't say it was normal," he said. "I think we're reverting back to what used to be normal and we just need to get used to that.
"Negative interest rates is mad... let's say that that was exceptional and we won't see it again - but we don't want to see it again, in the sense that we had it because things were so bad; we don't want to see them that bad again."