European Central Bank president Christine Lagarde said the central bank could raise interest rates more quickly if necessary.
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European Central Bank president Christine Lagarde on Tuesday brushed aside concerns about a recession in the eurozone and also said her team is ready to raise interest rates more quickly – if necessary – if inflation continues to climb.
Central bank officials have gathered in Portugal for their annual conference, focusing on rising consumer prices. The eurozone is expected to see headline inflation this year at 6.8%, well above the ECB’s target of 2%.
This comes at a time when economists are wondering whether or not the eurozone will escape recession this year. The region has seen growth levels deteriorate amid an energy crisis, sanctions against Russia and food insecurity – just to name a few factors.
“We have significantly lowered our growth forecasts over the next two years. But we still expect positive growth numbers from domestic buffers against the loss of growth momentum,” Lagarde said at the Sintra Forum on Tuesday.
The European Central Bank held an emergency meeting earlier this month to announce a new tool to tackle fragmentation risks in the eurozone. However, market parties were left with questions about the timing and size of the mechanism.
Investors are concerned about high inflation and are closely monitoring what the ECB says and does. Investors are also wary of the high debt levels in Europe, particularly Italy, and how a return to tighter monetary policy could become a financial drag on these economies.
“If the inflation outlook does not improve, we will have enough information to act faster. However, this commitment is data dependent,” Lagarde added on Tuesday.
Increase or decrease rates?
Speaking to CNBC, Erik Nielsen, chief global economist at UniCredit, said he doesn’t expect this year’s forum to address differences between sovereign debt levels, but focus more on the future of monetary policy.
“Can you really push interest rates into recession even when inflation is high? That would be unusual,” he said.
In early June, the ECB confirmed its intention to raise interest rates next month and then again after the summer. This would likely push the ECB’s deposit rate out of negative territory and mark a huge moment for the central bank, which has kept interest rates below zero since 2014.
For the time being, the interest rates on the main refinancing operations, the marginal lending facility and the deposit facility remain unchanged at 0.00%, 0.25% and -0.50% respectively.
Speaking to Annette Weisbach of CNBC in Portugal, European Central Bank policymaker Pierre Wunsch said he believes the Frankfurt institution should act quickly in the first instance.
“My view is that roughly the first 200 basis points, so to go to positive 150, are more or less no brainer if we are still in a positive growth environment,” the governor of the Belgian central bank said.
“Because then real wages would still be negative. And I don’t think we’re taking a lot of risk by moving to a place where real interest rates are still negative. And by the time we do, we’ll know a lot more about it.” where inflation goes.”
He added that unless there’s really bad news, and maybe new shocks in terms of the real economy, “I think the next 150, 200 basis points are more or less no fiction and we have to react relatively quickly to that. “
But there are doubts that Lagarde will continue with multiple rate hikes as the region’s growth prospects darken. The ECB forecast a GDP rate of 2.8% for the eurozone in June this year, but economists are beginning to talk about the prospect of a recession towards the end of the year from the Russian invasion of Ukraine and the impact this has on the global economy.
According to Nielsen, the Federal Reserve in the United States is in the same position.
“There is a very high probability that the Fed will cut interest rates by the end of next year or something, and this is the recession story again,” he said.
“They can’t do what they say, they will do the next one and maybe another walk, but then it becomes very difficult for them, both in the US a little later, and in Europe,” he added. †