Which is the most effective and most proportionate and most appropriate ECB monetary policy? Lagarde

Lagarde: On the issue of quantitative tightening: what we are focussed on at present is the most effective and most proportionate and most appropriate monetary policy instrument that we can use. We believe at the moment that it is the policy rate. So we are using the policy rate, we will continue using that policy rate in the next several meetings, as I have said, and of course we will look at other monetary policy instruments. At this point in time, it is still premature. It is a matter that we will of course debate amongst members of the Governing Council in due course.

#eudebates the unique initiative aiming to promote debate, dialogue, knowledge, participation and communication among citizens. #ECB #Lagarde #inflation #rates #Economy #Eurozone

European Central Bank President Christine Lagarde said interest rates will be increased as much as is required to bring inflation back to 2%.

“We are sending a clear message to companies, employees and investors: inflation will return to our target value of 2% in the medium term,” she said in an op-ed for Germany’s Funke Mediengruppe. Measures taken so far “are already having an impact on interest rates across the euro area.”

The comments come a day after the ECB raised rates more than expected, ending eight years of negative interest rates to fight inflation that hit 8.6% in June and is expected to accelerate further. The 50 basis-point hike brought the deposit rate to 0%, ending eight years of negative rates. Investors see about 113 basis points of addition ECB rate increases by year-end, according to market bets.

“We will raise interest rates for as long as it takes to bring inflation back to our target,” Lagarde added. The Governing Council will “decide on the right pace for our next steps based on the newly available data.”

Prices are driven higher largely due to factors that are beyond the control of central bankers, Lagarde said. But the ECB’s actions were aimed at making sure that the inflation rate “doesn’t remain high permanently,” which could happen if a wage-price spiral were to materialize, the president said.

The new tool to contain market turmoil that the ECB presented on Thursday “will maintain the consistency of our monetary policy, helping to keep prices stable over the medium term,” Lagarde said.

The European Central Bank has raised interest rates for the first time in 11 years by a larger-than-expected amount, joining steps already taken by other major central banks across the world to target stubbornly high inflation.

The move, announced on Thursday, raises new questions about whether the rush to make credit more expensive will plunge major economies into recession at the cost of easing prices for people spending more on food, fuel and everything in between.

The ECB’s surprise hike of half a percentage point for the 19 eurozone countries is expected to be followed by another increase in September, possibly of another half a point. The bank's President Christine Lagarde had indicated a quarter-point hike last month.

The bigger hike was justified by an “updated assessment of inflation risks,” the ECB said, and means the bank leaves an era of negative interest rates.

“Economic activity is slowing. Russia’s unjustified aggression towards Ukraine is an ongoing drag on growth," Lagarde said at a news conference following the announcement. “The impact of high inflation on purchasing power, continuous supply constraints and higher uncertainty are having a dampening effect on the economy. Taken together, these factors are significantly clouding the outlook for the second half of 2022 and beyond."

Thursday's decision means the ECB joins the likes of the US Federal Reserve and other major central banks in raising interest rates. The move reflects a rate of inflation that turned out to be higher and more stubborn than first expected, the dubious state of an economy heavily exposed to the war in Ukraine, and a dependence on Russian oil and natural gas.

Recession predictions have increased for later this year and the following year, as soaring electricity, fuel and gas bills deal a blow to businesses and people's purchasing power.

“The economic outlook is worsening by the day," said Carsten Brzeski, chief eurozone economist at ING bank. “At the same time, headline inflation is still increasing and in our view will only come down gradually towards the end of the year, if it comes down at all.

“In hindsight, the very gradual and cautious normalisation process the ECB started at the end of last year has simply been too slow and too late,” he added.

Recession concerns have helped push the euro to a 20-year low against the dollar, which has made the ECB's battle against inflation even harder by worsening already high energy prices. This is because oil is priced in dollars.

Raising rates is seen as the standard cure for excessive inflation, now running at 8.6% in the eurozone in June and largely driven by soaring energy prices.