ECB president notes changing nature of inflation, ‘job not yet done’

The president of the European Central Bank, Christine Lagarde, said on Tuesday at a gathering in Portugal that the nature of inflation in the euro zone is changing and that it is unlikely in the near future that the institution will be able to declare that benchmark rates have reached their maximum level.

Speaking in Sintra, near Lisbon, at the opening of the ECB Forum, Lagarde reaffirmed its view that inflation in the euro zone is too high and is set to remain so for too long, and that the bank’s commitment to bring it down to its 2% inflation target remains.

“We have not yet seen the full impact of the cumulative rate hikes we have decided on since last July – amounting to 400 basis points,” she said. “But our job is not done.”

The ECB president reaffirmed what was signalled at the last meeting of the bank’s Governing Council this month: “Barring a material change to the outlook, we will continue to increase rates in July.”

Lagarde explained that there remain two sources of uncertainty that affect the “level” of key rates and the “length” of time they stay at certain levels.

“First, since we face uncertainty about the persistence of inflation, the level at which rates peak will be state-contingent,” she noted. “It will depend on how the economy and various forces I have described evolve over time. And it will have to be continuously re-assessed over time.”

Secondly, there is face uncertainty about the strength of monetary policy transmission.

“The strength of transmission connects current decisions with expectations of future policy and therefore affects the policy stance,” she told her audience of policy makers and economists. “How strong transmission turns out to be in practice will determine the effect of a given rate hike on inflation, and this will be reflected in the expected policy path.”

Lagarde recalled that part of this uncertainty lies in the fact that the euro zone has not experienced a sustained phase of interest rate increases since the mid-2000s and rates have never risen so quickly.

“First, we need to bring rates into “sufficiently restrictive” territory to lock in our policy tightening,” she said. “Second, we need to communicate clearly that we will stay ‘at those levels for as long as necessary’. This will ensure that hiking rates does not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialise.”