Lagarde warns ECB may do more to rates than remove stimulus

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<p>Christine Lagarde, President of the European Central Bank (ECB), speaks at the European Banking Congress in the Alte Oper (Old Opera) in Frankfurt, Germany, Friday, Nov. 18, 2022. The 32nd European Banking Congress is being held in Frankfurt under the motto PHOTO CREDIT: The Associated Press' src='https://biztimes.biz/wp-content/uploads/2022/11/63778eb377dc6.image_.jpg'/>

Christine Lagarde, President of the European Central Bank (ECB), speaks at the European Banking Congress in the Alte Oper (Old Opera) in Frankfurt, Germany, Friday, Nov. 18, 2022. The 32nd European Banking Congress is being held in Frankfurt under the motto 'Coping with transformational change'. (Hannes P. Albert/dpa via AP)

PHOTO CREDIT: The Associated Press
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Posted By: The Associated Press November 18, 2022

FRANKFURT, Germany — European Central Bank President Christine Lagarde warned today that the bank may have to raise interest rates beyond merely withdrawing stimulus and into territory that could restrain growth as the bank fights to control record inflation in the 19 countries that use the euro.

“We expect to raise rates further, and withdrawing accommodation may not be enough,” Lagarde said in a speech at a banking forum in Frankfurt, Germany. She said the bank intended to bring inflation down “in a timely manner” and that “how far we need to go, and how fast, will be determined by the inflation outlook.”

The ECB has raised rates at the fastest pace in its history to combat inflation that hit 10.7% in the eurozone in October, the highest since statistics started being kept in 1997 and far above the bank’s goal of 2%.

Inflation has been fed by high natural gas prices caused by Russia’s cutbacks in gas supply during the war in Ukraine and by bottlenecks in supplies of parts and raw materials as demand rebounds from restrictions imposed during the coronavirus pandemic.

In response, the central bank has lifted its benchmarks by two full percentage points since July. Analysts expect more increases to come from a Dec. 15 meeting.

Lagarde cautioned governments against excessive spending on support for consumers and businesses hit by high energy costs, saying that such financial assistance needed to be temporary and targeted at the people most in need of help. Otherwise, spending could push up demand and thus inflation, and weaken incentives for people to conserve energy.

Higher central bank interest benchmarks influence the cost of lending, raising the price of credit and making it more expensive to borrow, spend or invest, thus reducing demand for goods and, in theory, restraining prices.

While higher rates are a key tool to contain inflation, their use can raise concerns about the impact on growth. The eurozone economy grew only 0.2% in the July-September quarter.

Many economists are predicting a recession at the end of this year and the start of next year as inflation robs consumers of purchasing power. Bank officials say higher rates now will avoid the need for even more drastic measures later on if inflation continues to run out of control.

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