European Central Bank President Christine Lagarde said on Friday that interest rates may need to be raised to levels that constrain economic expansion; To reduce inflation, which has risen to five times the official target, according to Bloomberg News. Lagarde added that the “risk of a recession” has increased, but the occurrence of deflation would not be enough to reduce high prices by itself.
And while the European Central Bank has already announced the most aggressive monetary tightening in its history, the cost of borrowing is expected to rise to 2% or more next month, from 1.5% today.
“We expect to raise rates further, and it will not be enough to withdraw monetary easing… and we will eventually raise rates to levels that will return inflation to our medium-term target in due course,” Lagarde said in a speech. in Frankfurt.
The European Central Bank is aiming for an inflation rate of 2%, but data last October showed that the rate in the euro area was 10.6% higher than in the same month last year. The inflation rate in Germany, Europe’s largest economy, is 10.4%.
Lagarde noted that the risk of a recession has increased, even though there have been few positive surprises in GDP data recently, adding: “Interest rates have been and will continue to be the primary tool for adjusting our policy stance. But we also need to normalize our other policy mechanisms, and thus increase the momentum of our pricing policy.
He noted that the efforts made over the past decade to stabilize the eurozone economy have resulted in the European Central Bank buying up large quantities of European government bonds. Now they have to be sold to lighten the ECB’s books. And she said, “At our next meeting on Dec. 15, we will set out the main principles for reducing bond holdings under our asset purchase program.”
European Central Bank officials say borrowing costs must continue to rise to meet the fastest inflation since the introduction of Europe’s single currency, the euro, more than two decades ago. But after consecutive hikes of 75 percentage points, the appetite for such big steps could cool, especially as the 19-country eurozone is expected to stagnate in the winter.
Lagarde’s speech appears to be an oblique comment on reports that European Central Bank policymakers may consider slowing the rate of hikes in interest rates by offering just a 50 basis point hike next month, people familiar with the news said. the question.
And the Bloomberg news agency quoted on Thursday, according to the people, who declined to be identified due to the confidentiality of board deliberations, that initial discussions indicate a lack of momentum to move interest rates by 75 more basis points in the present tense. Barring another surprise spike in inflation, they said, the consensus would favor a less drastic move.
