Europe’s interest rates to stay high as long as needed to defeat inflation, central bank chief says

Frankfurt, June 27 (BNA): European Central Bank President Christine Lagarde warned Tuesday that inflation is gripping the economy and confirmed that the bank intends to raise interest rates enough to “break this insistence.”

Lagarde acknowledged that inflation has fallen from an all-time high last year as energy prices fell and the bank has implemented a rapid series of rate increases, which aim to combat rising prices by making it more affordable for consumers and businesses to borrow and spend, according to the Associated Press (AP). AP).

“We are seeing a decline in the rate of inflation as the shocks that originally drove inflation diminish and our monetary policy measures are transmitted to the economy,” she said in her opening speech at the European Central Bank’s annual conference in Sintra, Portugal.

“But the passage of those shocks continues, which makes the decline in inflation slower and the inflation process more continuous,” Lagarde added.

Firms initially went through their increased costs by charging customers higher prices, a phase that was starting to wear off. Now, with the unemployment rate at record lows, workers are demanding higher wages to make up for lost purchasing power that threatens to continue driving inflation higher into a wage-price spiral that the Bank must prevent.

So far, Lagarde said, workers have “lost out from the inflationary shock, seeing a significant drop in real wages, which has resulted in a continuing catch-up as they try to recoup their losses. This leads to an increase in other measures of core inflation.”

She said the ECB needed to “decisively address this dynamic” by raising interest rates as often as needed. Lagarde said the bank would discourage “expectations of a very rapid policy reversal” and keep interest rates high for as long as possible.

Inflation in the 20 countries using the euro was 6.1 percent in May, down from a peak of 10.6 percent in October after a slump in energy prices, which rose after Russia’s invasion of Ukraine.

But inflation is well above the bank’s target of 2%, which is considered best for the economy. Core inflation, which excludes volatile food and fuel prices, is stubbornly rising at 5.3%. New inflation figures will be published on Friday, with analysts at Deutsche Bank expecting a further drop in headline inflation, to 5.8%.

Higher interest rates can weaken the economy and increase recession risks. Europe’s economy has already contracted slightly in the last months of 2022 and the first three months of this year, with two consecutive quarters of lower output being one definition of a recession.

However, the bank is expected to raise interest rates again by a quarter of a percentage point next month.

Lagarde promised such a hike at the bank’s meeting this month, and repeated in her speech on Tuesday that “unless there is a fundamental change in expectations, we will continue to raise interest rates in July.”

Central banks around the world have been rapidly increasing borrowing costs to combat inflation caused by the global recovery from the COVID-19 pandemic and Russia’s war in Ukraine.

The Federal Reserve paused rate hikes at its meeting this month, but Chairman Jerome Powell, who will speak Wednesday with Lagarde and the heads of central banks in other major economies, said Fed officials expect to raise rates more this year.

The BoE surprised with a huge half point increase last week.

HF