Europe will need to face higher interest rates as a potential recession won’t be enough to bring down inflation on its own, ECB President Christine Lagarde says

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Policy makers at the European Central Bank “expect to raise rates further,” said President Christine Lagarde on Friday.  The ECB has already been raising rates at a record pace with inflation “too high” in the euro area. Policymakers reportedly may decide to slow the pace of rate hikes at the December meeting. Loading Something is loading.

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With inflation running at a record high in the eurozone, the European Central Bank will have to continue raising interest rates to get price pressures back under control, ECB President Christine Lagarde said Friday. 

“We have acted decisively, raising rates by 200 basis points, and we expect to raise rates further to the levels needed to ensure that inflation returns to our 2% medium-term target in a timely manner,” Lagarde said in a speech at the European Banking Congress. 

“Inflation in the euro area is far too high,” she continued. “And with inflation likely to remain high for an extended period, we need to monitor the evolution of inflation expectations very carefully.”

The ECB this year has pulled up its benchmark lending rate by the fastest-ever pace. Meanwhile, inflation scaled up to a record high of 10.6% in October year over year, led by ballooning prices for energy. Russia’s war against Ukraine plunged Europe into an energy crisis this year, forcing regional leaders to scramble to secure natural gas supplies. 

While eurozone economic data have surprised on the upside recently, “the risk of recession has increased,” Lagarde said. 

“[Historical] experience suggests that a recession is unlikely to bring down inflation significantly, at least in the short run,” she said. “In this setting, displaying commitment to our mandate is vital to ensure that inflation expectations remain anchored and second-round effects do not take hold.” 

As Lagarde telegraphs further rate hikes, policy makers may decide to slow the pace of increases at their December 15 meeting, Bloomberg reported Friday.

Initial discussions suggest a move of 50 basis points may be more likely — down from last month’s increase of 75 basis points — as long as there’s not an upside surprise in the November inflation reading, the report said, citing people with knowledge of the matter.

“[Rate] increases help us to withdraw support for demand more quickly. And they send a clear signal to the public of our determination to bring down inflation, which will help anchor expectations,” said Lagarde. 

The euro slipped against the dollar on Friday, by 0.1% to $1.0352.

See the latest EUR-USD movements here.


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