ECB’s Lagarde: Terminal Rate to Be Based on Outlook, Shock Persistence, Wages and Expectations

28 November 2022

By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Monday said that the terminal rate of the ECB's hiking cycle would depend on the outlook, how long shocks are felt, how key variables respond and the effectiveness of ECB monetary policy.

Speaking at European Parliament, Lagarde said that ‘the Governing Council decisions will continue to be data-dependent and follow a meeting-by-meeting approach.’

‘How much further we need to go, and how fast we need to get there, will be based on our updated outlook, the persistence of the shocks, the reaction of wages and inflation expectations, and on our assessment of the transmission of our policy stance’, she said.

Lagarde reiterated the ECB’s intention of coming up next month with ‘the key principles’ of quantitative tightening. ‘It is appropriate that the balance sheet is normalised over time in a measured and predictable way’, she repeated.

‘Interest rates are, and remain, and will remain, the main tool for fighting inflation’, as these depress demand when increased and that ‘in turn will put downward pressure on prices, although the adjustments will take some time to be felt in the economy’, she said.

Higher borrowing costs also help ward off second-round effects, she said.

Still, historically low joblessness would probably boost wages, she said. The ECB would assess data suggesting such a development with respect to inflation prospects, she said.

Lagarde urged that fiscal policy ‘not add to inflationary pressure’ and thus be ‘targeted, tailored and temporary.’

Growth, she said, was ‘now slowing down rapidly as a consequence of the war.’

‘High uncertainty, tighter financial conditions and weakening global demand are also weighing on economic growth, which is expected to continue weakening for the remainder of this year and the beginning of next year’, she said.