The president of the European Central Bank (ECB), Christine Lagarde, estimated this Wednesday that the recent tensions around the banking sector are generating “new risks” for the economy, at a time when the monetary institute still has “way to go” . fight inflation.
Financial turbulence linked to recent bank failures has created “new downside risks” for the economy, Lagarde told a forum in Frankfurt. “Given the accumulation of shocks and geopolitical changes, the degree of uncertainty is expected to remain high,” he added.
“Inflation remains strong”
The institution’s scenario of a return of inflation to 2% in 2025, if confirmed, shows that there is “a long way to go to contain inflationary pressures”, stressed the ECB president. The ECB has raised its interest rates at unprecedented speed, increasing them by 350 basis points since July, in an attempt to contain inflation that exceeded 10% in October, after the Russian invasion of Ukraine.
“However, inflation remains high and uncertainty about its evolution has increased”, which requires having “a robust strategy for the coming period”, hammered the former Minister of Economy. The bet of a return to price stability, defined by an inflation rate of 2% in the medium term, is still far from being won: the pressures on prices “have spread” with inflation “below”, excluding the energy and food sectors, which currently oscillates “between 4 and 8%”, according to Christine Lagarde.
For this reason, it was necessary to raise rates to “sufficiently restrictive levels to curb demand,” according to her. This process is “just starting to kick in now,” she warned. For the continuation of the tightening of the credit floodgates, the ECB has abandoned its expectations and wants to rely on the data from the moment it meets with its Governing Council. “In other words, ex ante, we are not committing to continue raising rates, or to end the increases,” Christine Lagarde said. A certainty according to her: “There is no contradiction between price stability and financial stability.”
“bumpy” road
ECB Executive Board member Fabio Panetta also highlighted the dilemma facing central banks, describing “a difficult balancing act.” “We have to navigate between the risk of not reacting enough, which could prolong the inflationary effects of the shocks, and the risk of overreacting, which could turn volatility into instability,” explained this official, a supporter of a flexible monetary policy. policy.
He also noted the difficulty of raising interest rates while reducing liquidity through “quantitative tightening,” noting that there were no precedents for anticipating the combined effects of these two measures. This could “make the policy adjustment more bumpy,” added Fabio Panetta.
This quantitative tightening, another ECB anti-inflationary tool, consists of reducing the size of its balance sheet inflated by years of measures to support the economy. Unexpected crises, such as the recent bankruptcy of Silicon Valley Bank in the United States”, show that sudden changes in monetary policy can “even lead to serious financial stress”, he observed.
Source: BFM TV
