Christine Lagarde, the president of the European Central Bank, reduced the chances of a “measurable tightening” of monetary policy to address this year’s record inflation in the eurozone, saying any shift would be gradual.
With financial markets giving up an interest rate hike in June, Lagarde told the European Parliament on Monday that the ECB “does not need to rush to any premature conclusion at this point – the outlook is far too uncertain”.
Her remarks were more cautious than last week when she caused a sell-off in the eurozone bond markets by refusing to rule out a possible rate hike this year, saying there was “unanimous concern” about inflation on the ECB governing body.
However, Lagarde also said on Monday that she no longer expects inflation to fall below its 2 percent target by the end of this year.
Eurozone inflation ignored expectations of a decline at the beginning of this year, rising to a record 5.1 percent in January. Lagarde said it would “continue to be high in the near term” before declining over the course of the year.
Lagarde said there was a “real chance that inflation would stabilize” at the 2 percent target, which she said would lead to a “normalization of our monetary policy”.
The ECB’s Governing Body will meet next March. If it is confident that inflation will stay at the target over the next two years, Lagarde said, it will “make the necessary decision”. This will include the “gradual reduction” of its asset purchases, which it has used to provide additional stimulus to the eurozone economy, and then “raising interest rates”.
Carsten Brzeski, head of macro research at ING, said Lagarde was “trying to put the falconry genius back in the bottle after an aggressive repricing in markets after Thursday’s ECB meeting”.
Eurozone government bond prices continued to fall on Monday, pushing up borrowing costs in some southern European countries, such as Greece, to pre-pandemic levels. Bond prices fall as yields rise.
The spread between Italian 10-year borrowing costs and that of Germany – a key measure of stress in the eurozone bond markets – has risen to 1.63 percentage points, the highest level since July 2020.
Frederik Ducrozet, a strategist at Pictet Wealth Management, said: “The lack of change in tone in the face of a significant re-pricing in stock markets is in itself an important signal.”
He predicted that the ECB would probably raise rates for the first time in September or December, after ending its net asset purchases in the third quarter. The bank last raised rates in 2011.
Lagarde has been repeatedly asked by MEPs whether the ECB will intervene to curb the rise in borrowing costs for peripheral eurozone countries.
She said: “We will use any instruments, any instruments necessary to ensure that our monetary policy is properly communicated to all Member States throughout the euro area.”
The president of the ECB also stressed that the eurozone economy has no “overheating of the labor market” – unlike the US or the UK. She said it is in a “completely different” situation in terms of the size of its fiscal stimulus, the strength of demand and the level of core inflation, which excludes energy and food prices.
Eugen Jurzyca, a Slovak MEP, said: “People are genuinely concerned about what will happen in the coming months, as inflation was much higher than forecast and governments are faced with difficult questions or whether to respond with compensation measures. . “