The European Central Bank (ECB) may need to raise interest rates to a level that restricts economic growth to combat unacceptably high inflation, ECB President Christine Lagarde said on Tuesday.
“If there was evidence that high inflation risks unpinning inflation expectations, then the policy rate that is consistent with our target would be in tightening territory,” he said in a speech.
“The appropriate pace of future interest rate hikes will be decided at each meeting. Indeed, as we have repeatedly emphasized, we will remain data dependent in all scenarios,” the ECB president said.
In the last two meetings, the ECB raised its interest rates by 125 basis points in total, the largest increase in its history, Let me go at an event organized by the Frankfurt Society for Commerce, Industry and Science. Before these increases, interest rates were at an unusually low level (0%), so the risk of overreacting at the beginning of the upward cycle is limited, according to Lagarde.
“Where we finally leave interest rates and the extent of the steps we take will depend on how the inflation outlook evolves as we proceed,” Lagarde said.
Monetary authorities have talked of pausing rate hikes once the ECB reaches a so-called “neutral” level, which neither stimulates nor slows growth, but a growing number of rate-setters now see the risk that the cost of credit has to be higher.
For now, the ECB has said that it is normalizing its monetary policy, which means ending debt purchases and raising interest rates to a neutral level, which is neither expansionary nor restrictive.
Inflation is already above 9% and may yet accelerate as longer-term expectations, a benchmark for rates, now move above the ECB’s 2% target.
With information from AFP and EFE