In a speech at an annual conference of central bankers in Jackson Hole, Wyoming, European Central Bank (ECB) President Christine Lagarde announced that interest rates in the EU will remain high “as long as necessary” to combat persistently high inflation. Lagarde emphasized that while progress is being made, the fight against inflation is not yet over.
The ECB has been taking measures to address inflation by raising interest rates. Since last summer, the central bank has increased its benchmark rate nine times, moving it from -0.5% to 3.75%. These rate hikes have resulted in a significant decrease in Eurozone inflation, which has gone down from a peak of 10.6% in the previous year to 5.3% in July 2023.
However, despite the apparent slowdown in inflation, Lagarde cautioned that underlying pressures and risks still remain. She expressed concerns that if global supply becomes less elastic, particularly in the labor market, and if there are larger and more frequent shocks like energy or geopolitical events, prices may become more volatile.
Lagarde highlighted that the future decisions of the ECB regarding rate hikes will depend on various factors, including the inflation outlook, core price growth, and the impact of monetary policy measures. She emphasized the importance of a timely return of inflation to the ECB’s target of 2% in the medium term.
The upcoming August inflation reading, which will be released by EU statistical agency Eurostat, is expected to show a further slowdown in price growth to 5%. However, economists polled by Reuters note that this would still be more than double the target level.
It remains uncertain whether the ECB will pause its tightening policy or implement another rate hike at its next meeting on September 14. Lagarde’s speech indicates that the ECB will continue to adjust interest rates based on the evolving inflation situation and the effectiveness of its policy measures.
In summary, Lagarde’s speech at the central bankers’ conference emphasized the ECB’s commitment to maintaining high interest rates in the EU to tackle inflation. Despite the recent slowdown in inflation, the ECB remains cautious and vigilant about underlying pressures and risks. The future decisions on rate hikes will be guided by the inflation outlook and the impact of monetary policy measures.