ECB’s Lagarde: Economic Outlook Darkening, to Hike Rates Further over Next Few Meetings

26 September 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday said that the Governing Council intended to continue raising interest rates at its coming meetings even as economic prospects were deteriorating.

In a speech at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament, Lagarde said that the economic outlook was ‘darkening’ and that inflation was ‘far too high’ and likely to remain above-target ‘for an extended period.’

‘As things currently stand, we expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations’, she said. ‘We will regularly re-evaluate our policy path in light of incoming information and the evolving inflation outlook. Our future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.’

As before, Lagarde said that inflation was becoming more broadly based, and that supply constraints continued to generate price pressures, despite their recent easing. Pent-up demand for services was also bolstering prices, as was the euro’s depreciation, she said.

Wage developments were still ‘contained’, but ‘resilient labour markets and some catch-up to compensate for higher inflation are likely to push up wage growth’, she said. And although inflation expectations were generally around 2%, ‘signs of recent above-target revisions to some indicators warrant continued monitoring’, she said.

‘The risks to the inflation outlook are primarily on the upside, mainly reflecting the possibility of further major disruptions in energy supplies’, she said. ‘While these risk factors are the same for growth, their effect would be the opposite: they would increase inflation but reduce growth.’

Activity was seen slowing ‘substantially’ over the next quarters, she said, citing high inflation, the deceleration of services demand, softer global demand and high uncertainty.

‘Higher energy and food prices are weighing in particular on the most vulnerable households and the situation is expected to get worse before it gets better’, she said, urging that fiscal policy be applied in a temporary and targeted manner.

‘This limits the risk of fuelling inflationary pressures, thereby also facilitating the task of monetary policy to ensure price stability, and contributing to preserving debt sustainability’, she said.

‘The best contribution monetary policy can make to the euro area economy is to ensure price stability over the medium term’, she added. ‘This means ensuring inflation expectations remain well anchored and that demand conditions are consistent with our target.’