The President of the European Central Bank (ECB) said today “it is unlikely that a recession will bring inflation down much, at least in the short term”, and assured that interest rates will be raised in line with the price outlook.
In her speech at the 32nd European Banking Congress in Frankfurt, ECB President Christine Lagarde said that her institution would raise interest rates to levels that would bring inflation down to 2% over the medium term.
The outlook for inflation will determine to what extent and at what speed the ECB will raise interest rates, Lagarde warned.
Lagarde also said that interest rates are and will be the main instrument of monetary policy adjustment, but other monetary policy instruments also need to be normalized, which is why the ECB will decide in December on how to reduce bond holdings. programs.
The ECB president said the threat of recession in the eurozone is now more serious despite stronger-than-expected economic growth data and said it was “vital” to demonstrate the institution’s commitment to its price stability mandate.
“While the latest data on GDP growth surprised on the positive side, the risk of a recession has increased,” Lagarde said.
However, he recalled that historical experience shows that a recession is unlikely to bring inflation down significantly, at least in the short term, so it is “critical” that the ECB demonstrates commitment to its mandate to ensure that inflation expectations remain unchanged and that the lack of effects second order.
In this regard, he acknowledged that inflation in the eurozone is too high, with a record 10.6% in October, warning that it is likely to “remain high for a long period.”
“We are committed to bring inflation down to our medium-term target and will take the necessary steps to do so,” he added.
However, the ECB president said that while monetary policy would ensure that inflation returned to its medium-term target, the evolution of the economic outlook would also depend on coherence between monetary policy and other actors, emphasizing the importance of fiscal policy.
In the short term, in a high-inflation environment, fiscal intervention must be temporary, targeted, and tailored, and looking ahead, since monetary policy can drive demand but cannot remove current constraints to growth, policies in other areas will need to take over.
In his opinion, the removal of these restrictions will not only restore the supply side, which has suffered from recent crises, but will also strengthen domestic demand over time in a world where external demand is becoming less predictable.
“The drive to accelerate three fundamental transitions will define our future: towards cleaner energy, greater economic security, and a more digital and productive economy,” he stressed.
In that sense, he warned that when the time came for governments to consolidate their fiscal policies, they would have to choose between cutting transfers as well as public consumption and raising taxes or cutting public investment.
“If they choose the latter, as they did after the big financial crisis, there is a risk that supply will not recover and that growth constraints will continue to limit growth,” he added.