Inflation in the eurozone is too high and shows no sign of decreasing anytime soon, European Central Bank President Christine Lagarde at the opening of the ECB Forum in Portugal on Tuesday, adding that the bank remains committed to lowering inflation by 2%.
“We have not yet seen the full impact of the cumulative rate hikes we have decided on since last July – amounting to 400 basis points,” she said. “But our job is not done.”
The ECB president reaffirmed what was signalled at the last meeting of the bank’s Governing Council this month: “Barring a material change to the outlook, we will continue to increase rates in July.”
Lagarde explained that two sources of uncertainty remain that affect the “level” of key rates and the “length” of time they stay at certain levels.
“First, since we face uncertainty about the persistence of inflation, the level at which rates peak will be state-contingent,” she noted. “It will depend on how the economy and various forces I have described evolve over time. And it will have to be continuously re-assessed over time.”
Secondly, there is face uncertainty about the strength of monetary policy transmission.
“The strength of transmission connects current decisions with expectations of future policy and therefore affects the policy stance,” she told her audience of policymakers and economists. “How strong transmission turns out to be in practice will determine the effect of a given rate hike on inflation, which will be reflected in the expected policy path.”
Lagarde recalled that part of this uncertainty lies in the fact that the eurozone has not experienced a sustained phase of interest rate increases since the mid-2000s, and rates have never risen so quickly.
“First, we need to bring rates into “sufficiently restrictive” territory to lock in our policy tightening,” she said. “Second, we need to communicate clearly that we will stay ‘at those levels for as long as necessary’. This will ensure that hiking rates do not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialise.”
(Ânia Ataíde, edited by Shrikesh Laxmidas | Lusa.pt)
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