Christine Lagarde has warned that the European Central Bank “isn’t done” raising interest rates and said inflation “has a long way to go”.
Her comments came after a sharp fall in European wholesale energy prices coupled with an easing of supply chain tightening raised hopes of slowing euro-zone inflation. US inflation also eased in October and global data indicators suggest this year’s rampant global inflation has peaked.
But the ECB President struck a pessimistic tone. “I would like to see inflation [as] I peaked in October but I’m afraid I wouldn’t go that far.”
Some investors expect the ECB, in line with the US Federal Reserve, to move to smaller rate hikes of 0.5 percentage point instead of 0.75 percentage point.
But Lagarde’s comments to MPs suggested the ECB was not ready to slow down. “We need to stop stimulating demand,” she said, adding that the bank is in “very accommodating territory” suggesting it needs to tighten further.
Soaring energy and food prices, sparked by Russia’s invasion of Ukraine and the lifting of coronavirus lockdowns, pushed euro-zone inflation to an all-time high of 10.6 percent by October.
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Economists polled by Reuters expect euro-zone inflation to slow to 10.4 percent in November when the latest price data from the European Commission’s statistics agency is released on Wednesday. However, Lagarde said there will still be some “pass-through” from higher wholesale energy prices to consumer prices.
Natural gas prices have fallen about 40 percent since peaking in September, but Lagarde said this reflected mild weather in Europe of late, which has reduced energy use and helped fill gas storage facilities, adding that conditions are improving could deteriorate in the next year.
“We have to be very, very cautious because in the gas futures markets the decline hasn’t been that clear and the causes of that gas decline and the lower pressure on short term interest rates we have to be careful if they will last” , she said.
Lagarde’s comments suggest there is likely to be lively debate at next month’s ECB meeting, with policymakers tossing between maintaining the pace of rate hikes to stave off a wage-price spiral and switching to smaller ones increases on signs of a recession are divided.
Philip Lane, the ECB’s dovish chief economist, said last week that euro area consumer price growth would slow next year and many of the arguments for another 0.75 percentage point hike in interest rates “no longer exist”.
But Klaas Knot, the hawkish head of the Dutch central bank, said on Monday it was not a “foregone conclusion” that Europe would enter a recession and that concerns about overly tightening of ECB policy were “a bit of a joke”.
Knot added: “We need to prepare for an extended period in which policymakers and central bankers need to be vigilant and focused on restoring price stability.”
Analysts at Goldman Sachs said on Monday that a change in how Italy calculates energy prices could push euro-zone headline inflation to a new record 11 percent in November, putting pressure on the ECB to maintain the scale of its rate hikes.
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