Lagarde says there are risks of slower growth and higher inflation in the short term.

Short-term growth prospects for the eurozone are waning as inflation rises, European Central Bank (ECB) President Christine Lagarde said Thursday.

“A long-term war in Ukraine remains a serious risk” to growth, Lagarde said at a press conference after the ECB’s monetary policy meeting, warning that “the possibility of a recession is increasingly on the horizon.”

Risks to the inflation outlook are “growing,” Lagarde added, after year-on-year inflation in September was close to 10% in the eurozone.

The ECB President urged eurozone governments to reduce public debt.

“Governments must adopt fiscal policies that demonstrate their determination to gradually reduce high levels of public debt,” he said.

Lagarde indicated that at its December meeting, the ECB will decide to reduce its balance sheet, which has grown significantly thanks to asset purchase programs adopted in recent years to keep interest rates low and support the economy.

At the end of today’s meeting, the ECB announced a further increase in interest rates by 75 basis points to curb record inflation in the eurozone.

With this growth, the third in a row and the second of its size, the main refinancing rate of the ECB is 2%.

The “journey” to normalize the money supply is not yet over, and Lagarde warned that “there is still a lot to be done” and there will be further increases to bring prices down.

He added that price changes would be critical and decisions would be made at every meeting.

The institution will also reduce incentives on loans granted in recent years to banks on exceptional terms to support the economy.

In a statement, the ECB explained that it had decided to change the terms of the third series of long-term refinancing operations by adjusting the applicable interest rates from November 23, and also decided to “offer banks additional voluntary prepayment dates”.

“During the pandemic, this tool has been critical to counter the risks of declining price stability. Currently, due to the unexpected and extraordinary increase in inflation, this tool needs to be recalibrated to ensure its compatibility with the more general monetary policy normalization process and to increase the pass-through of the key rate hike to bank financing conditions,” the institution explained.