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ECB does not need to fight inflation with ‘same force’ as in 2022-23, Lagarde says
President of central bank signals that there could be a modest increase in interest rates
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Olaf Storbeck in Sintra
Published6 hours ago
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The European Central Bank does not need to fight inflation now with the same force it did in 2022-23, Christine Lagarde said on Monday, signalling policymakers believe they can respond with a limited increase to interest rates.
Opening the ECB’s annual Sintra conference, the ECB president said policymakers could now “make measured adjustments to rates, calibrated to the shocks we face”, arguing that Europe’s greater economic resilience had reduced the need for crisis-era monetary policy.
Two weeks after the ECB increased rates for the first time in close to three years in response to the Middle East energy shock, Lagarde stressed that “we no longer need to act with the same force” as in 2022 and 2023, when the central bank embarked on “the fastest tightening cycle in our history”.
Back then, the ECB lifted its benchmark deposit rate from -0.5 per cent to 4 per cent in little more than a year.
The ECB in June increased borrowing costs by a quarter point to 2.25 per cent, after inflation reached 3.2 per cent in May. It was the first central bank in the G7 to increase borrowing costs following the US-Israeli war against Iran.
Lagarde portrayed the ECB as having moved beyond the financial crisis-era toolkit that dominated monetary policy for more than a decade, arguing that interest rates had once again become the central bank’s primary policy instrument.
She stressed that the June decision to raise rates was not an “insurance hike” intended to offset potential future inflation threats.
Lagarde said that without the increase, inflation would have remained above the ECB’s 2 per cent target in both 2027 and 2028.
According to the June baseline projection by ECB staff, inflation will fall to 2 per cent during 2027.
“Our rate increase was justified under every scenario considered,” Lagarde said, adding that the fall in oil prices since the extension of a ceasefire between the US and Iran had not altered the ECB’s assessment.
“Nothing we have observed since then has called this assessment into question.”
Lagarde did not give any guidance on the ECB’s future course of action on rates. Markets continue to expect one further quarter-point increase by October, according to Reuters calculations.
“We no longer need complex forms of forward guidance. Our decisions are data dependent and taken meeting by meeting,” Lagarde said, adding that the quality of the ECB’s economic forecasts has improved markedly over the past few years as the central bank switched to “more granular forecasts for oil, gas and electricity” after initially missing the 2022-23 jump in inflation.
“Projection errors since the outbreak of the war in the Middle East have been very small,” she said.
Lagarde also argued the European economy had become more resilient in recent years, saying the euro area “weathered the largest US tariff increase in almost a century as well as what the International Energy Agency has called the largest oil supply disruption in history”.
While she acknowledged that “the costs have been substantial”, Lagarde said “the economy has not been derailed”.
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