ECB’s Lagarde: Eurozone Economy Not at Point Where Interest Rates Should Rise.

20 January 2022

By David Barwick – FRANKFURT (Econostream) – The Eurozone economy is, in contrast to that of the US, not yet at the point where interest rates should rise, European Central Bank President Christine Lagarde said Thursday.

In an interview on French public radio channel France Inter, Lagarde said, ‘You have to understand what it means, the increase in government yields. It means that the fundamentals of the economy are recovering. It means that there is confidence in growth and that it is known that under these conditions, interest rates will gradually rise.’

‘So, we are not there yet in the Eurozone’, she continued. ‘We have a very precise timetable with three criteria ... and we are going to start by slowly stopping the purchases of public and private debt at the end of March for the emergency programme ... and when we have finished buying sovereign debt, at that point we will look at interest rates. So we are not at the same pace as the Americans.’

Inflation is higher in the US and the business cycle at a later stage, she said, meaning European monetary policy has no reason to act as forcefully as the Federal Reserve.

‘But we have started to respond, and we are obviously ready to respond in terms of monetary policy if the numbers, the data, the facts tell us to’, she said.

She rejected again calls for the ECB to pick up the pace. ‘The problem with monetary policy, or rather the way it works, is that you can't act right away’, she said. ‘If I raise interest rates today, it will have an effect in 6 to 9 months, the time it takes to move down the financing chain. In 6 to 9 months, what effect does that have? It slows down growth.’

‘So it's a question of knowing whether we're going to be a brake or a shock absorber’, she continued. ‘I would like monetary policy to be a shock absorber ... but above all not a brake on growth. ... If we suddenly face inflation now, which will be temporary … we will do much more harm to the economy than good.’

Lagarde reiterated her expectation that both rampant energy price rises and supply bottlenecks would ease, and with them inflation.

‘We consider that during 2022 [inflation] will stabilise and decrease gradually over the year’, she said. ‘It's going to fall less than what all the economists on the planet had envisaged a year ago, but it will fall.’

It is uncertain how far inflation will subside, she said. ‘But we see a fall, and we see that fall continuing through 2023 and 2024, because energy prices are not going to continue to rise indefinitely, and bottlenecks will eventually resolve’, she said.

A new economic stimulus plan 'does not seem necessary in the current state of activity, because we have had solid activity, we have growth that is important’, she said. ‘We have a good recovery.’