Despite inflationary pressure, ECB leader rejects bets on higher interest rates

The tightening of monetary policy now to contain inflation could stifle the euro zone’s recovery, said the president of the European Central Bank, Christine Lagarde, on Monday (15) rejecting the market’s defense of a more restrictive action.

With inflation already twice above its 2% target and likely rising further later this year, the ECB is under increasing pressure to abandon its ultra-stimulating monetary policy and tackle rising prices, which are eroding the purchasing power of countries. families.

Speaking to European Union lawmakers, Lagarde admitted that the inflation peak will be higher and longer than previously thought, but said it will weaken next year, so monetary policy action will now hit the economy as soon as price growth starts to moderate on its own.

“At a time when purchasing power is already being pressured by higher energy and fuel bills, an undue tightening of financing conditions is not desirable and would represent an unwarranted obstacle to recovery,” Lagarde said at a committee hearing. of the European Parliament’s economy.

“If we took any restraining measures now, it could do a lot more damage than any good,” she said.

With commodity prices soaring and bottlenecks in the supply chain persist, inflation is proving more rigid than anticipated.

As elsewhere, eurozone bond markets rushed to price higher inflation and the prospect of tighter monetary policy in the coming months.

An important market measure of eurozone inflation expectations is not far from the ECB’s 2% inflation target, and markets price a first 10 bp increase in interest rates in September 2022. Yields of the titles rose after Lagarde’s comments on Monday.

Lagarde repeated that the conditions for a 2022 rate hike are “very unlikely” to be met, but said he cannot make a similar commitment for the coming year.

“I don’t think I would venture into 2023, but certainly for 2022, I repeat the point I made at the time,” she said.

Deutsche Bank CEO Christian Sewing disagreed with the narrative that inflation is temporary and called for action by global central banks.

“I think monetary policy should take countermeasures here — and sooner rather than later,” Sewing said. “The supposed panacea of ​​the last few years – low interest rates with apparently stable prices – has lost its effect and now we are fighting the side effects.”