On Tuesday, the head of the Central Bank of Europe said it would gradually combat soaring consumer prices with interest rate hikes in July and September. Still, it will keep its options open to ‘stamp out’ inflation if it surges faster than projected.
Central Bank of Europe combats surging inflation
In a speech opening an ECB forum on central banking in Sintra, Portugal, the Central Bank President, Christine Lagarde, asked policymakers to target inflation that was soaring at a record 8.1% in the 19 countries using the Euro.
With new inflation numbers due on Friday, Lagarde said that the bank is using the dual approach to respond to economic uncertainty.
Russia’s war in Ukraine has led to rolling energy and food prices that are higher than those seen in the 1970s and 80s, and given its energy dependence, the euro area is facing these shocks acutely, Lagarde said.
She said that the size and complexity of these shocks also create uncertainty about how persistent this inflation is expected to be.
On Friday, the Central Bank of Europe announced that it would end asset purchases that worked to boost the economy and follow with its first interest rate hikes in 11 years at its meeting next month. If inflation keeps spiking, the Central Bank of Europe will also raise rates in September, leaving the option open for a more considerable hike than the quarter-point increase in July.
The Central Bank of Europe would avoid upsetting economic growth by acting too aggressively. In addition, it revised the forecast for growth in the coming two years, Lagarde said.
There are clear conditions in which gradualism would not be apt. Lagarde further indicated that people would see higher inflation threatening the economy or signs of a more permanent loss of economic potential. Therefore, the bank would need to withdraw accommodation more promptly to prevent a self-fulfilling spiral risk.
The other central banks worldwide, including the U.S. Federal Reserve, have moved quicker than the ECB to combat roaring inflation. But they risk spurring a recession as they make borrowing pricier. Fed Chair, Jerome Powell, acknowledged last week that recession was a certainty.
The Federal Reserve has raised rates three times this year, including an increase of three-quarters of a point that marked its most significant hike in nearly three decades. The Bank of England has raised rates five times since December last year.
On 28th June 2022, the Bank of England Governor, Andrew Bailey, and the Fed Chair, Jerome Powell, will join Lagarde for a policy panel discussion at the ECB forum.
