“Although progress is being made, the fight againstinflation it's not won yet." This is the heart of the speech by the president of the ECB, Christine Lagarde, at the economic symposium of Jackson Hole in Wyoming last night. Therefore, Lagarde underlines, the ECB must keep rates at a "sufficiently restrictive level for the necessary time" to achieve a "prompt return of inflation to the 2% target". However, the president of the ECB makes no mention of a possible move to raise rates also in September.
His speech followed that of the chairman of the Federal Reserve Jerome Powell , who similarly stated that the Fed was ready to raise rates further to counter inflation which is still high in the US, but -added Powell- using caution.
Inflation in the 20 countries that use the euro fell from last year's peak of 10,6% to 5,3%, largely reflecting the sharp decline in energy prices. But inflation still exceeds the ECB's 2% target. The central bank raised its key rate from -0,5% to 3,75% in one year, the fastest pace since the launch of the euro in 1999. The effects on the economy were felt: the European economy recorded an expansion of only 0,3% in the April-June quarter compared to the first three months of the year.
Lagarde: “clarity, flexibility, humility”
According to Lagarde there are three key elements for the ECB "clarity, flexibility and humility“. "First of all, we need to clarify our goal and the constant commitment to achieve it" and "clarity will be important to establish the appropriate role of monetary policy in the transitions underway", he points out, adding that "faced with a changing world , monetary policy should not itself become a source of uncertainty”. “This will be crucial, she underlines, to keep inflation expectations firmly anchored even in the event of temporary deviations from our target, as might happen in an economy more prone to shocks. And it will also be key to maintaining public confidence that, even in a new environment, we will not lose sight of our goal."
Major changes in energy markets and business models
Much of Lagarde's speech then focused on disruptions in global and European economies that may require higher rates for longer than anticipated before the pandemic. Such challenges include the need to increase investment in renewable energy and address climate change, the rise of international trade barriers after the pandemic, and the problems created by Russia's invasion of Ukraine. "Over the past three years, people around the world have experienced a series of unprecedented shocks, albeit to varying degrees," said the ECB president. “We have faced the pandemic, which brought about a partial shutdown of the global economy. We are facing a war in Europe and a new geopolitical landscape, leading to profound changes in the energy markets And in the business models. And climate change is accelerating, forcing us to do everything we can to decarbonise the economy. A visible impact of these changes has been the return of high inflation globally, which has caused suffering for many people.
September yes, September no
But what the markets want to know is whether there will be another rate hike in September or not. In yesterday's speech Lagarde made no mention of a possible move next month as well, with a good portion of analysts expecting the ECB to leave rates stable at these levels for a "certain" period. On the occasion of last ECB meeting at the end of July to journalists who asked her if there would be an increase in September as well, Lagarde had replied "We have an open mind about what the decisions will be in September and in subsequent meetings," she told reporters. “So we could ramp up or we could sit still.”
