ECB Could Continue With Rate Hikes After Pause, Lagarde Says

30 July 2023

By Xavier D’Arcy – FRANKFURT (Econostream) – A decision by the European Central Bank not to raise interest rates would not necessarily signify the end of its rate hike cycle, President Christine Lagarde said on Sunday.

In an interview with French daily Le Figaro, Lagarde said that recent GDP data from some Eurozone countries supported the ECB’s projection of a soft landing for the euro area economy.

At the ECB Governing Council’s upcoming meeting, there ‘could be a further hike of the policy rate or perhaps a pause’, she said, adding: ‘A pause, whenever it occurs, in September or later, would not necessarily be definitive.’

A soft landing for the Eurozone economy was the ‘ideal solution’, she said, describing the perfect scenario as ‘a moderate lowering of activity in tandem with a significant fall in inflation.’ The second-quarter GDP data for France, Germany and Spain were ‘quite encouraging’, she said, arguing that ‘[t]hey support our scenario of GDP growth of 0.9% in the euro area this year.’

‘[M]onetary policy has clearly begun to have an impact on lowering inflation’, she said, noting the impact on credit data, via interest rates, credit volume and firms’ demand for loans. ‘We are also beginning to see [an impact] in the real economy: in the real estate sector and with regard to investment’, she said.

There was currently ‘no sign of a wage-price spiral emerging’ in the Eurozone, given ‘inflation expectations and the wage increases negotiated collectively and individually’, she said. But the ECB’s projections ‘expect firms to absorb part of the cost of the wage increases in their margins’, she noted.

Lagarde reiterated the ECB’s data-dependent approach to upcoming decisions, saying that policymakers would only know when they have reached the inflation target ‘by looking at the economic and financial data. And we will base our actions on our assessment of these data.’

‘We are in an environment of uncertainty and will reassess the situation and our action on a meeting-by-meeting basis’, she said. She expressed confidence in the progress the ECB was making towards lowering inflation to 2%: ‘We have covered a lot of ground and have made great progress in this fight against inflation. We are moving towards our goal.’