Inflation in the Eurozoneis undesirably high” and the central bank will act as “determined and sustainedagainst the rise in prices, assured this Tuesday Christine Lagarde, president of the European Central Bank (ECB). In Sintra, for the annual ECB Forum, Lagarde says that the central bank is available to “go as far as necessary” to lower the rate of inflation towards levels closer to the medium-term objective of 2%.
It is a “great challenge” that the inflation rate is at high levels -above 8%-, mainly because the ECB recognizes that the pace of price increases will remain high “for some time”. Christine Lagarde says that the ECB will move forward “gradually” but always “with the option to act more decisively if there is any deterioration in inflation expectations in the medium term, especially if there are signs of a de-anchoring in inflation expectations“.
The ECB confirms that it plans to raise interest rates on July 21, which will be the first rate hike in the eurozone since 2011; it should be a first increase of only 25 basis points (a quarter of a percentage point). Another increase is also expected to arrive in September and Christine Lagarde admits again that “the size of the September increase could be larger if necessary“.
Christine Lagarde says, however, that even with the current high rate of inflation, “we are not looking at a normal situation of excess demand or generalized overheating”. Investment remains “conditional” and, “despite the increase in spending on services, private consumption in the eurozone remains 2% below the level prior to the pandemic,” Lagarde underlines.
At the same time, however, “inflationary pressures are intensifying and spreading” across economies, with signs that price increases are taking root mainly in the services sector. Secondly, “The end of the war between Russia and Ukraine is not in sightand, in this context, “we face risks of supply cuts that could contribute to keeping energy prices at high levels”.
Although she promises to fight against high inflation, Christine Lagarde recognizes the danger that this normalization of monetary policy will lead to too high divergences between the debt costs of different countries. For this reason, as had already been announced, the ECB is preparing a new instrument that, Lagarde guarantees, will be “effective, as well as proportionate, and will contain sufficient safeguards to preserve the incentive of member states to apply sound fiscal policies”..
This is one of the main doubts about the “new instrument” that is being prepared: how can the ECB buy debt from countries that have greater pressure on the markets? The Direct Monetary Transactions (OMT) program, launched by Mario Draghi in 2012, required the countries involved to have a budget plan approved by the European Stability Mechanism. In this new instrument, this may not be necessary, but Lagarde guarantees that purchases will be made in a way that will not create incentives for countries not to follow sound fiscal policies.
Source: Observadora
