Christine Lagarde, president of the European Central Bank, downplayed the prospect of a “measurable tightening” of monetary policy to tackle this year’s record inflation in the eurozone, saying any move would be gradual.
With rising prices in the financial markets in June, Lagarde said The European Parliament said on Monday that the ECB does not see the need to rush with any premature conclusions at the moment – the prospects are too uncertain.
Her comments were more cautious than last week when she sparked a sell-off in eurozone bond markets since refusing to exclude potential rate increase this year and saying there was “unanimous concern” about inflation on the ECB’s Governing Council.
However, Lagarde also said Monday that he no longer expects inflation to fall below the 2 percent target by the end of this year.
Inflation in the eurozone defied expectations of a decline earlier this year, rising to a record 5.1 percent in January. Lagarde said it would “continue to be high in the near future” before falling during the year.
Lagarde said there was a “real chance that inflation would stabilize” at the 2 percent target, which she said would lead to “normalization of our monetary policy.”
The Governing Council of the ECB meets next in March. If she was convinced that inflation would remain at the target level for the next two years, Lagarde said, “she would make the necessary decision.” This would include a “gradual reduction” in the purchase of assets, which it used to further boost the eurozone economy, followed by an “increase in interest rates”.
Carsten Brzeski, head of macro research at ING, said Lagarde “tried to put the hawk’s spirit back in the bottle after an aggressive price change in the markets after the ECB’s meeting on Thursday”.
Eurozone government bond prices continued to fall on Monday, restoring the borrowing costs of some southern European countries, such as Greece, to pre-pandemic levels. Bond prices fall as yields rise.
The gap between Italy’s 10-year borrowing costs and Germany’s – a key measure of stress in eurozone bond markets – has risen to 1.63 percentage points, the highest level since July 2020.
Frederik Ducrozet, strategist at Pictet Wealth Management, said: “The lack of change in tone in the face of significant price changes in rate markets is an important signal in itself.”
He predicted that the ECB would likely raise rates for the first time in September or December, after ending a net purchase of assets in the third quarter. The bank last raised rates in 2011.
MEPs have repeatedly asked Lagarde whether the ECB would intervene to curb rising borrowing costs for peripheral eurozone countries.
She said: “We will use all the tools, all the instruments needed to ensure that our monetary policy is properly transmitted throughout the euro area, to all Member States.”
The President of the ECB also stressed that the eurozone economy did not have “overheating of the labor market” – unlike the US or the United Kingdom. She said she was in a “completely different” situation in terms of the size of fiscal stimulus, the strength of demand and the level of core inflation, which excludes energy and food prices.
Eugen Jurzyca, a Slovak MEP, said: “People are genuinely concerned about what will happen in the coming months as inflation is much higher than projected and governments are facing difficult questions about whether to respond to compensatory measures.”