ECB Not Committed to Hike or to Stop in May, but Baseline Implies Further Action, Lagarde Says

22 March 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde said on Wednesday that the ECB was neither committed to hiking nor finished with rate hikes at its next meetings.

Speaking at the ECB and Its Watchers conference, she repeated that if the baseline scenario from the ECB’s projections last week were confirmed, more hikes would be necessary.

‘[W]ith high uncertainty, it is even more important that the rate path is data-dependent’, she said. ‘This means, ex ante, that we are neither committed to raise further nor are we finished with hiking rates.’

She said that ‘if the baseline scenario in our most recent projections is confirmed, we will still have ground to cover to make sure that inflation pressures are stamped out.’

The ECB would fight inflation by ‘following a robust strategy that is data-dependent and embeds a readiness to act, but that does not entertain trade-offs around our primary objective’, she said.

For inflationary pressures to ease, it was ‘important that our monetary policy works robustly in the restrictive direction’, she noted, adding that ‘that process is only starting to take effect now.’

The ECB would, she said, be ‘paying close attention to a range of indicators’ to assess the pass-through of its rate hikes. Policymakers would be monitoring ‘for a further strengthening’ of monetary policy transmission, she said.

‘[U]nderlying inflation dynamics remain strong’ in the Eurozone, she said. The ECB did so far ‘not see clear evidence that underlying inflation is trending downwards.’

There were ‘two forces pushing underlying inflation in different directions’, she said. Falling energy prices were beginning to be reflected in core inflation numbers, but could be offset by increasing domestic price pressures.

‘The key issue in determining which of these forces wins out will be developments in wages’, she said.

She warned that the euro area could see ‘a more prolonged cost-push shock coming from wage growth.’

There was potential for a ‘feedback mechanism between higher profit margins, wages and prices’, she said. The risk of such a dynamic was ‘heightened by the prospect that labour market tightness will linger’ in the euro area.

Lower demand would lead to firms having ‘to absorb cost increases in margins’ and price pressures starting to ease, she said.