Christine Lagarde has warned that the European Central Bank is “not done” with raising interest rates, saying that inflation “still has a long way to go”.
Her comments come after a sharp drop in wholesale energy prices in Europe combined with the easing of supply chain bottlenecks encouraged hopes that eurozone inflation is slowing. US inflation also fell in October and global data indicators show this year global inflation has reached its peak.
But the ECB president has adopted a bearish tone. “I want to see inflation [as] peaked in October, but I’m afraid I won’t get that far.”
Some investors expect the ECB to move to smaller rate hikes, in line with the US Federal Reserve, of 0.5 percentage points instead of 0.75 percentage points.
But of Lagarde suggestions for MEP indicates that the ECB is not ready to slow down. “We have to stop stimulating demand,” she said, adding that the banks are in “highly supportive territory”, suggesting they must tighten further.
Soaring energy and food prices as a result of Russia’s invasion of Ukraine and the lifting of coronavirus lockdowns sent eurozone inflation to all-time highs. 10.6% for the year to October.
Economists polled by Reuters expect eurozone inflation to fall to 10.4% in November, as the latest price data comes out of the European Commission’s statistics office announced on Wednesday. But Lagarde said there is still some “pass-through” from higher wholesale energy prices to consumer prices to come.
Natural gas prices have fallen about 40% since their peak in September, but Ms Lagarde said this reflects recent mild weather in Europe that has helped reduce energy consumption and help fill tanks. gas storage facilities, adding that conditions could change for the worse next year.
“We need to be very, very careful because in the gas futures market the drop is negligible, and the reason behind this drop in gas and the downward pressure on short-term interest rates, we We have to be careful whether they happen or not. finally,” she said.
Lagarde’s comments suggest there is likely to be a heated debate at next month’s ECB meeting, with policymakers detached between maintaining interest rate increases to avoid a wage spiral and switching to smaller increases after signs of recession.
Philip Lane, the dovish ECB chief economist, said last week that the pace of growth in eurozone consumer prices would start to taper off next year and there were arguments for further rate hikes. 0.75 percentage points “no more”.
But Klaas Knot, the hawkish head of the Dutch central bank, said on Monday that it was not a “forgotten conclusion” that Europe would enter a recession and tightening policy worries. ECB’s excessive tightening is “a joke”.
“We must prepare for an extended period in which policymakers and central bankers will have to focus on restoring price stability,” Knot added.
Analysts at Goldman Sachs said on Monday that a change in the way Italian energy prices are calculated could push overall eurozone inflation to a new record of 11% in November, which would put pressure on the ECB to maintain the scale of the rate hike.