"L 'inflation in the euro area it is too high and will likely remain so for too long. Facing a more inflationary dynamic persistent, we cannot let our guard down and we cannot yet declare victory”. This was stated by the president of the European Central Bank Christine Lagarde, in his speech at the annual conference in Sintra, Portugal. As part of her Whatever It Takes against inflation, the number one of the ECB reiterated (as anticipated) new rate hikes in July: “The overall impact of the rate increases decided since last July, equal to 400 basis points, has not yet been fully realized. But our work is not finished yet. Barring a substantial change in the inflation outlook, we will continue to raise rates in July”, said Lagarde, preferring not to give too many anticipations on what the long-term trend in rates will be. But his tone remains hawkish, sinking again the hopes of the doves. “Monetary policy currently has only one priority: to bring inflation back to ours in a timely manner 2% target in the medium term. And we are committed to achieving that goal no matter what. As Helen Keller wrote: 'Our worst enemies are not belligerent circumstances, but hesitant souls'”.
Lagarde: "How can we break this persistence?"
“In the Governing Council of the ECB we clarified that there will be two fundamental elements of our monetary policy stance: we will have to bring rates to 'sufficiently restrictive' levels and keep them at these levels for as long as necessary”. But both, explains Lagarde, are weighed down by the uncertainty surrounding the persistence of inflation and the intensity of the transmission of monetary policy to inflation. “Firstly, since the persistence of inflation is surrounded by uncertainty, the maximum level of rates will be determined on the basis of the current circumstances. It will depend on how the economy and various forces evolve over time. Second, the uncertainty about pass-through stems from the fact that the euro area has not experienced a sustained phase of rate hikes since the mid-2000s and has never seen such rapid hikes. This is why we ask about rhythm and onintensity of the transmission of monetary policy to firms and households, respectively through interest-sensitive spending and the payment of mortgage loans”. Reason why, warns Lagarde, that establishing the right "level" and the right "duration" will be fundamental for the EU's monetary policy.
“Under these conditions, it is unlikely that in the foreseeable future the central bank will be able to declare with absolute certainty that the maximum level of rates has been reached. The decisions of our monetary policy must in fact be defined from time to time at each meeting and continue to be data-driven”, added the ECB president at the three-day Central Bankers Forum. “We have therefore established that our future monetary policy decisions will depend firstly on the inflation outlook, secondly on underlying inflation dynamics and thirdly on the intensity of monetary policy transmission”.
Tafani's reply: "So we risk the recession"
"I don't think that continuing to raise interest rates is going in the direction of growth, above all I don't agree with the announcements made well in advance as Lagarde did today", replies the deputy prime minister and foreign minister harshly Antonio Tajani at the congress of the Confsal. “We suffer from inflation that is different from the USA, it is caused by the cost of raw materials due to the war, today increasing the cost of money means putting businesses in difficulty. With interest rates that are too high, there is a risk of recession”, concluded Tajani.
Updated at 13:41pm on Tuesday, June 27, 2023
