ECB’s Lagarde says rates will remain high “as long as necessary”

The president of European Central Bank (ECB), Christine Lagardesaid this Monday that interest rates in the eurozone will remain at levels “sufficiently restrictive for as long as necessary” so that inflation falls towards the 2% objective.

“We believe that our rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation towards our objective”he stated in a debate with the Economic Affairs Committee of the European Parliament.

Lagarde thus reiterated the message that the institution has been repeating since on September 14 it decided to raise interest rates by another 25 basis points, until 4.5% in the case of the governing rate, without yet determining how long they should remain at this level.

He insisted that future interest rate decisions will depend on his inflation outlook based on incoming economic data, the dynamics of underlying inflation and the strength of his monetary policy transmission; and refused to give indications about whether there will be new increases.

He reiterated, however, that they are not thinking about a drop and that the Government Council “has not discussed rate cuts”.

Lagarde assured that the ECB “he has in mind the suffering he inflicts” the increase in interest rates, but defended that the faster inflation reaches the 2% and the more stable the prices “the less painful it will be from now on for those who invest and those who have borrowed.”

“We know that a 30% of households in the Member States have variable rate mortgages and it is tough. And we know that the price of fuel (…) it is also weighing on households with lower incomes, but we also know that our duty is to return inflation to its objective”he assured.

The president of the ECB stressed that inflation is falling, “but it is expected to remain too high for too long” and noted, in particular, that the “Domestic price pressures remain strong,” with services inflation driven by holiday and travel spending and “high wage growth.”

He also highlighted that the eurozone economy is expected to weaken in the third quarter of this year, after having stagnated in the first half, impacted by lower demand for eurozone exports, tougher financial conditions and the weakening of the services sector. .

The ECB’s latest projections lowered the growth forecast for this year and next, by 0.7% and to 1%respectively, and suggest that inflation will moderate until 5.6% at the end of 2023, at 3.2% in 2024 and will approach the target in 2025, with a 2.1%.

On the other hand, Lagarde once again asked the governments of the eurozone to withdraw the support measures they adopted in the face of the energy crisis now that it is dissipating to “avoid increasing inflationary pressures in the medium term”.

He also called on them to adopt fiscal policies aimed at “gradually reduce high public debt” and increase the productivity of the European economy.

In this sense, he urged to find an agreement on the rules of fiscal discipline of the European Union “Before the end of the year” to have a new framework when governments have to prepare their budgets for 2025 in autumn 2024.

“If it does not happen, given the succession of elections in the Member States, to the European Parliament, it is likely that it will be postponed and postponed for too long,” Lagarde said.

Another topic of discussion at the hearing was the excess liquidity that the system currently has, despite the fact that, as Lagarde shared with the MEPs, it has been reduced by one trillion euros in the last year for two reasons: reimbursements of loans to banks within the third round of long-term refinancing operations (TLTRO III) and the sale of securities acquired in the asset purchase program.

Within this point, the president of the ECB recalled that the bank is carrying out a review of its operating framework to establish the optimal size and composition of its balance sheet – and therefore the appropriate level of excess liquidity -, an exercise that It hopes to conclude during the spring of 2024.