ECB’s Lagarde: Further rate hikes ‘still in the pipeline’

Speaking at the ‘Deutscher Sparkassentag 2023′ event in Hanover yesterday (1 June), she said inflation is still too high and “is set to remain so for too long”, meaning “considerable tightening is still in the pipeline”.

ECB: Weaknesses in shadow banking increase spillover risk to European banking sector

She reiterated the ECB is determined to bring inflation down to its medium-term target of 2% in a “timely manner”, which is why the central bank has had to increase rates at its “fastest pace ever”.

Lagarde noted the increases are already feeding “forcefully” into bank lending conditions, but she admitted there is no certainty around how much stronger the transmission of the ECB’s policy will be.

“We need to continue our hiking cycle until we are sufficiently confident that inflation is on track to return to our target in a timely manner,” she added. “At the same time, we need to carefully assess the strength of monetary policy transmission to financing conditions, the economy and inflation.”

When the central bank started increasing rates in July 2022, they sat at -0.5%. In less than a year, the ECB has increased them by 375 basis points, resulting in the current 3.25%.

Lagarde explained the “deliberate and decisive” moves were aimed at fighting inflation, but she admitted the pace will be slower going forward, noting the reduction to 25bps moves at the central bank’s latest monetary policy meeting.

She was not able to pinpoint a limit for the rates, arguing hikes will be based on the ECB’s assessment of incoming data, factoring in three main elements: inflationary outlook; the dynamics of underlying inflation and the strength of monetary policy transmission.

EU growth forecasts ‘better than expected’ but UK lags

According to projections in March 2023, inflation is expected to drop to 2% in the second half of 2025. Lagarde said this does not mean the central bank is satisfied with the outlook, but the projections will be updated later in June and will inform whether further tightening is required.

On underlying inflation , she said “there is no clear evidence” it has peaked. The future trajectory will mostly depend on the balance between energy prices and wages, she explained.

Lagarde added the recent financial market tensions have intensified the tightening by “increasing banking funding costs and encouraging even more risk aversion”.

That is why the ECB is increasing its focus on monetary tightening transmission: “If the recent tensions do leave a lasting footprint on markets, a given level of rates would mean tighter financing conditions – and that would have to be reflected in the level at which rates peak,” Lagarde said.

“At the same time, there is also uncertainty about how tighter financing conditions will affect the economy, and whether the effects will be stronger or weaker than in the past.”

ECB probes eurozone banks on Silicon Valley Bank-style interest rate risks – reports

The effects are already being felt by constraining households’ total spending due to tighter financing conditions impacting certain sectors, such as durable goods, she noted.

Lagarde concluded: “The reaction function we have laid out will help to strike the right balance for our monetary policy decisions in the future: between further tightening to tame inflation on the one hand, and uncertainty about the speed and strength of policy transmission on the other.

“One thing, however, is certain: we will keep moving forward – determined and undeterred – until we see inflation returning to our 2% medium-term target in a timely manner.”

Checkout latest world news below links :
World News || Latest News || U.S. News

Source link

Back to top button