The president of the European Central Bank (ECB) considered this Friday “unlikely that a recession will reduce inflation much, at least in the short term” and assured that interest rates will increase in accordance with price prospects.
In a speech at the 32nd European Banking Congress in Frankfurt, ECB President Christine Lagarde said the institution she heads will raise interest rates to levels that will bring inflation to 2% over the medium term.
The inflation outlook will determine to what extent and at what speed the ECB will raise interest rates, Lagarde warned.
Lagarde also said that interest rates are and will be the main monetary policy adjustment instrument, but that other monetary policy instruments must also be normalized and that is why, in December, the ECB will decide how to reduce the holding of purchase bonds of debt. programs
The ECB president said the threat of recession in the eurozone is now more intense, despite better-than-expected economic growth data, and considers it “vital” to demonstrate the institution’s commitment to its price stability mandate.
“Although the latest GDP growth data has surprised on the positive side, the risk of recession has increased,” Lagarde said.
However, he recalled that historical experience suggests that a recession is unlikely to significantly reduce inflation, at least in the short term, so it is “vital” that the ECB shows commitment to its mandate to ensure that inflation expectations are remain anchored and exist without second-order effects.
In this sense, he recognized that inflation in the euro zone is too high, with a record of 10.6% in October, and warned that it is likely to “remain high for a prolonged period”.
“We are committed to bringing inflation down to our medium-term goal and we will take the necessary steps to do so,” he added.
However, the ECB president argued that, although monetary policy will ensure the return of inflation to the medium-term objective, the evolution of the economic outlook will also depend on the alignment between monetary policy and other actors, underlining the importance of budget policy.
In the short term, in a context of high inflation, fiscal intervention must be temporary, targeted and adapted, looking to the future, given that monetary policy can guide demand but cannot remove existing restrictions on growth, the policies of other areas will have to act.
In his view, removing these restrictions will not only rebuild the supply side that was affected by the recent crises, but will, over time, strengthen domestic demand in a world where external demand is becoming less predictable.
“A drive to accelerate three fundamental transitions will determine our future: towards cleaner energy, greater economic security, and a more digital and productive economy,” he stressed.
In this regard, he warned that when the time comes for governments to consolidate their budgetary policies, they will have to choose between reducing transfers, as well as public consumption, and raising taxes or cutting public investment.
“If they go for the latter, as they did after the great financial crisis, there is a risk that supply will not recover and that growth constraints will continue to constrain growth,” he added.
Source: TSF
