ECB’s Lagarde: Interest Rates at Peak; Must Stay Restrictive for as Long as Necessary

17 January 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde on Wednesday said that ECB interest rates had probably reached their peak and had to be maintained at the current level until there was confidence in the return to the inflation target.

In an interview with Bloomberg TV on the margins of the Annual Meeting of the World Economic Forum in Davos, Switzerland, Lagarde said she was confident that barring ‘another major shock, we have reached a peak’ and added, ‘Now, we have to stay restrictive for as long as necessary to make sure that we get to that state where we are all saying ‘ok, [we are] confident that [it] is at 2% medium-term’.

Inflation was aimed ‘directionally towards the 2%’, but the moment to declare victory would only come when there were both confidence and data supporting it, she said.

‘[T]he risk could be worse if we went too fast and had to come back to more tightening because we would have wasted all the efforts that everybody has put in the last 15 months’, she said, referring to criticism about a possible overshoot.

The key elements that ‘could have a serious impact on the work that we are doing against inflation’ and were being closely monitored by the ECB were wage negotiations, profit margins, energy prices and possible supply bottlenecks, she said.

Information on wage agreements available in April and May would indicate whether wages were slowly catching up in purchasing power and how long that process would take, she said, noting it was necessary to wait and see if there would be second-round effects.

‘So that gives us indication that we can corroborate and verify in the late spring, I would say, of ’24’, she stated.

Asked about market pricing of an early cut in interest rates, she said that ‘[i]t is not helping our fight against inflation if the anticipation is such that they’re way too high compared to what’s likely to happen.’

In the Governing Council there were different views about interest rate cuts and all of them were respected, she said.

‘I have to be reserved because we are also saying that we are data-dependent and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them’, she said, citing services as one of them.