Christine Lagarde confirms interest rate hike will continue pushing inflation closer to 2%

The president of the European Central Bank (ECB) confirmed this Friday that interest rate hikes are not yet over and will continue at the next monetary policy meetings to achieve a medium-term inflation target of 2%.

“We have raised rates by 200 basis points since July, the biggest increase in the history of the euro. But we are not done yet,” Christine Lagarde said in an interview published by the ECB.

At its latest monetary policy meeting last Thursday, the Governing Council decided to raise interest rates again by 75 basis points, moving the key interest rate by 2%, while the deposit rate is raised to 1.50% and the lending rate by 2%. .25%.

Lagarde insisted this Friday, in a message she had already delivered on Thursday, on considering new interest rate hikes “meet after meeting” and assessing, in each one, the evolution of the macroeconomic and inflation outlook, among other factors.

In response to criticism of this monetary policy strategy during a possible eurozone recession, the ECB president acknowledged that the likelihood of a recession in the Old Continent has “increased” and that uncertainty “remains high.”

He argued that this is why the central bank should do its job and focus on its mandate. “Our goal is price stability, and we must do it using all the tools at our disposal, choosing the most appropriate and effective,” explained Lagarde.

As for the specific level that rates will reach, Lagarde stressed that the bank’s goal is to bring inflation down to the 2% target over the medium term, a clear goal that still has a long way to go.

“The goal is clear and we haven’t reached it yet. We will have more interest rate hikes going forward,” Lagarde said, without providing more specifics given the current “highly uncertain” environment.

Regarding the risks of the current situation for the real estate market, Christine Lagarde acknowledged that strong price increases have a negative impact on the disposable income of households, especially those with low incomes. At the same time, he pointed out that the employment rate in the euro area is “remarkably resilient”, which has helped bolster household finances so far, along with savings built up during the pandemic and government support.

However, he acknowledged that households may be vulnerable to rising debt service costs, especially in countries where residential real estate is overvalued, debt levels are high, and most household debt is subject to floating interest rates.

In this regard, he believes that these risks are “best addressed through country-specific policies.” “We’ll get a picture later this month when we release our mid-year Financial Stability Review,” he added.

On banking issues and the impact of a possible increase in non-performing loans, Lagarde explained that ECB supervisors have begun reviewing the reserving practices of the eurozone’s most important banks to make sure they are ready.

However, the direct impact of the war on eurozone banks has so far been limited, he said, although conditions for business and the economy as a whole have changed.

As to whether this crisis is similar to the 2008 crisis, Lagarde noted that banks are currently in a better position, mainly because the ECB now exercises joint banking supervision in the eurozone.

However, he stressed: “We all need to be alert and ready to respond to anything that might happen.”

Finally, the ECB President recalled the central bank’s forecasts: “We published our latest round of forecasts in September. Baseline forecasts point to inflation at 8.1% this year, 5.5% next year and 2.3% in 2024. will slow down to 0.9% next year and reach 1.9% in 2024,” he explained.