European Central Bank President Christine Lagarde said on Friday that the European Union needs to keep interest rates high “for as long as necessary” to slow still-high inflation.
“While progress is being made,” she said, “the battle against inflation has not yet been won.”
Lagarde was speaking at the annual meeting of central bankers in Jackson Hole, Wyoming, against the backdrop of the ECB’s efforts to manage the economy Economic stagnation, inflation remains high. The central bank raised its benchmark interest rate from -0.5% to 3.75% in a year – the fastest increase since the introduction of the euro in 1999.
Higher rates make it more expensive for consumers to borrow to buy a home or car or to borrow money for business expansion and investment. Inflation in the 20 countries that use the euro has fallen to 5.3 percent from a peak of 10.6 percent last year, largely reflecting sharp falls in energy prices. But inflation remains above the ECB’s 2 percent target.
Much of Lagarde’s speech focused on disruptions to the global and European economies, which may take longer to raise interest rates than expected before the pandemic. These challenges include the need to increase investment in renewable energy and address climate change, rising barriers to international trade since the pandemic and problems caused by Russia’s invasion of Ukraine.
“If we also face larger, more common shocks – such as energy and geopolitical shocks – we may see companies pass on cost increases more consistently,” Lagarde said.
Her address is as follows Federal Reserve Chairman Jerome Powell speaks at Jackson Hole early FridayHe also said that if the U.S. economic growth remains strong and inflation cannot be curbed, the Fed is ready to raise interest rates further.
The double whammy of still-high inflation and rising interest rates has pushed the European economy to the brink of recession even as the European economy managed to grow 0.3 percent in the April-June quarter compared with the first three months of the year.
Lagarde has has been noncommittal until now Whether the ECB will raise interest rates at its next meeting in September, although many analysts do not expect the ECB to raise rates due to economic weakness.
Much of her speech on Friday focused on whether long-term economic changes would keep inflationary pressures elevated. She noted, for example, that moving away from fossil fuels “could increase the size and frequency of energy supply shocks.”
Lagarde said the ECB was seeking to develop a more forward-looking approach to policy to manage the uncertainty posed by these changes, rather than relying solely on “backward-looking” data.
Still, she reiterated her support for the ECB’s 2 percent inflation target.
“We’re not going to change the game midway,” she said.