Speaking at the annual conference of central bankers in Jackson Hole, Wyoming on Friday, European Central Bank (ECB) President Christine Lagarde said that in the EU, interest rates will be maintained at a high level “as long as necessary” as the central bank looks to rein in the persistently high inflation affecting the bloc.
Lagarde emphasized, “while progress is being made, the fight against inflation is not yet won.”
She said, “In the current environment, this means – for the ECB – setting interest rates at sufficiently restrictive levels for as long as necessary to achieve a timely return of inflation to our 2% medium-term target.”
The ECB has increased its benchmark interest rate nine times, raising it from negative 0.5% to 3.75%. At the same time, Eurozone inflation was cut in half, from the peak last year of 10.6% to 5.3% in July 2023. Lagarde gave no insight on whether the ECB would pause its tightening at its next policy meeting September 14th, or if it would proceed to hike rates a tenth time. She noted, however that even as inflation slows outwardly, the underlying pressures still remain, and so do the risks.
She said, “If global supply does become less elastic, including in the labor market, and global competition is reduced, we should expect prices to take on a greater role in adjustment… If we also face shocks that are larger and more common – like energy and geopolitical shocks – we could see firms passing on cost increases more consistently.”
Lagarde said that the ECB would make its future decisions on rate hikes with an eye to the inflation outlook, core price growth, and the effects which have been seen from previous monetary policy measures.
She added, “These three criteria help mitigate the uncertainty surrounding the medium-term outlook by blending together our staff’s inflation projections, the trend that we can extract from underlying inflation, and the effectiveness of our policy measures in countering that trend.”
August’s inflation data is expected to be released by the EU’s statistical agency Eurostat next week. According to a poll of economists by Reuters, it is expected that price growth will slow further to 5%, although that will still be over twice the ECB’s target rate for price growth.
