By Marta Vilar – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde said on Thursday that the ECB unanimously decided to raise interest rates by 25bp, with no other policy options discussed, describing the move as both “necessary” and “a signal.”
Speaking at the press conference following the Governing Council meeting, Lagarde said that today’s 25bp hike “was a unanimous decision without reservations,” and that no alternative proposal had been put on the table.
“There will be no preset rate path in our considerations,” she said, adding that “as a result of that, it will be what it will be.” She noted that this was not supposed to be understood as forward guidance.
Lagarde rejected the characterization of the move as an insurance hike, arguing that the shock was proving more persistent than expected and that the ECB was “beginning to see [its impact] broadening throughout the economy.”
She announced that the ECB had added a third case to its alternative scenario analysis, dubbed the “milder scenario,” which she described as “obviously more positive” and “at this point in time unlikely to materialize, but we still thought that it was our duty to look at both sides.”
“If we were not taking that very obvious monetary policy decision, then at the end of the medium term – that we look at for projection purposes – we would be north of our target,” she said.
Services inflation had increased significantly from 3% to 3.5%, she said, adding that the ECB could not yet determine whether the increase reflected direct or indirect effects.
She also referred to the three situations outlined in her speech at the ECB Watchers’ conference in March: one in which the ECB could look through the shock, one requiring a measured response and one requiring a forceful reaction.
While saying the ECB was no longer in a position to look through the shock, Lagarde declined to specify which of the remaining two scenarios best described the current environment.
“The decision we have made is not a forceful decision either,” she said. “25bp is a decision which clearly is a signal and is necessary given the economic situation that we have, given the uncertainty that we are navigating, given the inflation outlook that we have and the projections that are being produced by the Eurosystem staff.”
Lagarde said the Governing Council had not debated whether the hike left interest rates within the neutral range.
Addressing the ECB’s downward revision to growth forecasts, she argued that the weaker projections did not imply euro area growth was “absent or under significant threat.”
Asked about describing the decision as “robust,” Lagarde said the scenario analysis was key to understanding the term.
“So, if we had done, you know, adverse and severe scenario and then decided it was robust, yeah of course it is robust,” she said. “But we decided on purpose to do scenarios on both sides of the baseline, and even in the mildest scenario the 25bp hike is completely warranted and justified.”
Lagarde said the ECB was beginning to observe “a broadening of inflation throughout the economy” through both direct and indirect effects, but had not yet seen evidence of second-round effects. “But we are going to be extremely attentive,” she said.
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