The president of the European Central Bank (ECB) this Friday deemed “unlikely that a recession will reduce inflation much, at least in the short term” and assured that interest rates will be raised in line with the price outlook.
Speaking at the 32nd European Banking Congress in Frankfurt, ECB President Christine Lagarde said the institution she heads will raise interest rates to a level that will bring inflation back to 2% over the medium term.
Inflation prospects will determine how much and at what rate the ECB will raise interest rates, Lagarde warned.
Lagarde also said that interest rates are and will be the main tool for adjusting monetary policy, but that other monetary policy tools also need to be normalized and that the ECB will therefore decide in December how to reduce bond holdings. programs.
The president of the ECB said the threat of a recession in the eurozone is now greater, despite better-than-expected economic growth figures, and deems it “vital” to show the institution’s commitment to its price stability mandate.
“Although the latest GDP growth data surprised positively, the risk of a recession has increased”said Lagarde.
He recalled, however, that historical experience shows that a recession is unlikely to significantly reduce inflation, at least in the short term, and that it is “vital” for the ECB to demonstrate commitment to its mandate to ensure ensure that inflation expectations remain anchored and that there are no second-order effects.
In this regard, he acknowledged that inflation in the Eurozone is too high, hitting a record 10.6% in October, and warned that it is likely to “remain high for an extended period”.
“We are committed to bringing inflation back to our medium-term objective and will take the necessary steps to do so”he added.
However, the President of the ECB argued that while monetary policy will return inflation to its medium-term target, the evolution of the economic outlook will also depend on the coordination between monetary policy and other actors, underlining the importance of the fiscal policy underlined.
In the short term, in a context of high inflation, fiscal intervention should be temporary, targeted and adjusted, but looking to the future, as monetary policy can drive demand but cannot remove existing barriers to growth, policy will other areas need to take action.
In his view, lifting these restrictions will not only restore the supply side hit by the recent crises, but will also, over time, strengthen domestic demand in a world where external demand is becoming less predictable.
“A drive to accelerate three fundamental transitions will shape our future: towards cleaner energy, greater economic security and a more digital and productive economy”he underlined.
In this sense, he warned that when it comes time for governments to consolidate their fiscal policies, they will have to choose between cutting transfers and government consumption, and raising taxes or cutting public investment.
“If they choose the latter, as they did after the great financial crisis, there is a risk that supply will not recover and growth constraints will continue to limit growth”he continued.
Source: DN
