The head of the European Central Bank said on Tuesday he will act gradually to tackle soaring consumer prices with interest rate hikes in July and September, but will keep his options open to stamp out “inflation if it is increasing faster than expected”.
In a speech opening an ECB forum on central banking in Sintra, Portugal, the bank’s president, Christine Lagarde, used strong language as policymakers aimed for inflation at a record 8.1% in the 19 countries using the euro. With new inflation figures due on Friday, Lagarde said the bank is using the dual approach to be able to respond to economic uncertainty.
Russia’s war in Ukraine led to energy and food price spikes higher than those seen in the 1970s and 1980s, and given its energy dependence, the Eurozone is acutely experiencing these shocks. “, said Lagarde.
The magnitude and complexity of these shocks also create uncertainty about the likely persistence of this inflation,” she said.
The bank has already announced that it will end asset purchases that have helped stimulate the economy on Friday, and will continue with its first interest rate hikes in 11 years at its meeting next month. It will also raise rates in September, but leaves the possibility of a bigger hike than the quarter-point increase in July, in case inflation continues to climb.
The ECB is also trying to avoid further damaging economic growth by acting too aggressively, having revised our growth forecast sharply downwards for the next two years,” Lagarde said.
But there are obviously conditions in which gradualism would not be appropriate. If, for example, we were to see higher inflation threatening to unanchor inflation expectations or signs of a more permanent loss of economic potential,” she said, we would need to withdraw accommodation more quickly to eradicate the risk of a fulfilling self-spiral.”
Other central banks around the world, including the US Federal Reserve, have moved faster than the ECB to fight runaway inflation. But they face the threat of triggering a recession as they make borrowing more expensive, with Fed Chairman Jerome Powell acknowledging last week that’s certainly a possibility.”
The Fed has hiked rates three times this year, including a three-quarter point hike that marked its biggest hike in nearly three decades, and has forecast more. The Bank of England has raised rates five times since December.
Powell and Bank of England Governor Andrew Bailey will join Lagarde for a policy roundtable at the ECB forum on Wednesday.
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