The President of the European Central Bank (ECB), Christin Lagarde, has again raised the prospect of further hikes in key interest rates – the reason being the still much too high inflation in Europe. Meanwhile, the economic outlook darkened.
“Currently, we expect interest rates to be raised further in the next few sessions to dampen demand and avoid the risk of a prolonged upward shift in inflation expectations,” Lagarde told the European Parliament’s Economic and Monetary Committee on Monday.
“Inflation remains much too high and is likely to remain above our target for an extended period of time.”
Energy prices push up inflation
In August, annual inflation rose to a record 9.1 percent. The ECB is only aiming for a rate of two percent. Energy and food prices remain the main drivers, Lagarde said. But the devaluation of the euro on the foreign exchange market is also pushing up inflation.
The economic outlook is darkening, Lagarde said. Activity is likely to weaken “significantly” in the coming quarters. High inflation weighs on consumer spending and production. This development is reinforced by the shortage of natural gas. She also pointed to the weakening global economy and high levels of uncertainty.
Record rate hike recently
In the summer, after much hesitation, the ECB started the switch to higher interest rates. It increased it by 0.5 percentage point in July and by 0.75 percentage point in September. The Governing Council’s next regular monetary policy meeting is scheduled for October 27.
Care: Inflation could become entrenched
Bundesbank president Joachim Nagel is in favor of further decisive interest rate hikes by the ECB due to the risk of inflation expectations that are too high. “The risk that long-term inflation expectations are not anchored remains high,” Nagel said at an event in Berlin on Monday, the speech said. Monetary authorities speak of disengagement when inflation expectations are no longer in line with their inflation target. “Against this background, it is clear that further decisive action is needed to bring inflation to two percent in the medium term,” said Nagel.
Nagel explained how drastic the further interest rate hikes were, depending on the economic development and the demands of the moment. “The longer inflation remains high, the greater the risk that longer-term inflation expectations will rise significantly.” This would also encourage high inflation, he warned. The Board of Directors must prevent this. Economists say it is a difficult process for central banks to recapture inflation expectations once they have spiraled out of control.
Source: Krone
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
