ECB explains its anti-inflation plan
Interest rates in the EU will be kept high “as long as necessary” in order to combat persistently high inflation, European Central Bank (ECB) President Christine Lagarde said on Friday in a speech at an annual conference of central bankers in Jackson Hole, Wyoming.
According to Lagarde, “while progress is being made, the fight against inflation is not yet won.”
“In the current environment, this means – for the ECB – setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target,” she said.
Since last summer, the ECB has hiked its benchmark rate nine times from minus 0.5% to 3.75%. Eurozone inflation, meanwhile, has halved over the period from last year’s peak of 10.6% to 5.3% in July 2023. Lagarde did not say whether the ECB plans to pause its policy of tightening at its next meeting on September 14 or implement a tenth rate hike. She noted, however, that despite the outward slowing of inflation, underlying pressures remain, as do the risks.
“If global supply does become less elastic, including in the labor market, and global competition is reduced, we should expect prices to take on a greater role in adjustment... If we also face shocks that are larger and more common – like energy and geopolitical shocks – we could see firms passing on cost increases more consistently,” she stated.
Lagarde stressed that future ECB decisions regarding rate hikes will depend on the inflation outlook, core price growth, and the impact of monetary policy measures.
“These three criteria help mitigate the uncertainty surrounding the medium-term outlook by blending together our staff’s inflation projections, the trend that we can extract from underlying inflation, and the effectiveness of our policy measures in countering that trend.”
EU statistical agency Eurostat is expected to release August’s inflation reading next week. Economists polled by Reuters forecast price growth to slow further to 5%, but note that it will still be more than double the target level.
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