ECB: Lagarde dampens interest rate fantasies - High inflation is not permanent

Created: 2022-02-08 09:47

The head of the ECB, Christine Lagarde, expects inflation to stabilize in the medium term.

© Thomas Lohnes/dpa/AFP Pool

While many experts are concerned about rising inflation, ECB boss Christine Lagarde is more relaxed about the situation.

In the medium term, she expects stabilization at around two percent.

Frankfurt/Berlin - In view of the fantasies about interest rates running wild in the euro zone, ECB boss Christine Lagarde has dampened fears of inflation.

The chances have increased that the inflation rate will stabilize around the ECB target of 2.0 percent in the medium term, emphasized the Frenchwoman on Monday at a hearing before the Economic and Monetary Affairs Committee of the European Parliament.

The head of the ECB does not believe that a "significant tightening" of monetary policy is necessary

There are no signs that inflation will become persistent and well above target over the medium term, requiring "significant tightening" of monetary policy.

Rather, one can assume that the previously loose line will normalize, she said on her online appearance.

Leading economists have recently been much more cautious.

The economist Prof. Volker Wieland expects an inflation rate of just under four percent for the euro zone in the current year, and just above that for Germany*.

The Munich Ifo Institute now also sees the development more cautiously*.

After the most recent interest rate meeting, Lagarde did not repeat her earlier assessment that a turnaround in interest rates in 2022 was very unlikely.

The ECB left the key monetary policy rate at a record low of 0.0 percent.

At the same time, banks must continue to pay penalty interest if they park excess funds at the ECB: the so-called deposit rate remained at minus 0.5 percent.

The markets are expecting an increase of half a percentage point for this year.

However, many economists do not expect a first tightening step until the end of this year or early 2023.

At the end of 2022, inflation will probably remain above the ECB's target value, but will no longer reach the current high level, Lagarde predicted.

Surprisingly, inflation in the euro area climbed to 5.1 percent in January, further surpassing the ECB target.

According to Lagarde, however, the ECB must first stop its bond purchases before raising interest rates.

ECB boss keeps backdoors open

In view of the current uncertainty, it is “more than ever” important to retain flexibility and options in monetary policy, emphasized the ECB President.

The central bank remains “absolutely unshakable” in its mandate to ensure price stability.

There was already speculation on the markets that the first rate hike could come in July.

According to the head of the Latvian central bank, Martins Kazaks, the bond purchases by the ECB would have to be scaled back at an “extreme and incredibly fast pace”.

According to insiders, some monetary authorities wanted to take steps to curb inflation at the most recent meeting.

If inflation does not cool down noticeably, a decision at the March meeting is now likely, said two people familiar with the situation.

A faster reduction in the bond purchases of the so-called APP program will then be examined.

The bond purchases via the PEPP pandemic emergency program will end in spring.

To ensure that the financial markets are not left dry after the large-scale program expires in April, the ECB decided in December to allow the smaller APP program to continue in a modified form.

However, the monetary watchdogs deliberately left the end of this period, which is considered a prerequisite for the turnaround in interest rates, open.