June 28, 2023: On Tuesday, President of the European Central Bank Christine Lagarde said that Inflation is still too high and it’s too early for her organization to declare victory over consumer price rises.
She spoke at the Sintra central banking event in Portugal: “Inflation in the euro area is too high and is set to remain so for too long. But the nature of the inflation challenge in the euro area is changing.”
“This persistence is caused by the fact that inflation is working its way through the economy in phases, as different economic agents try to pass the costs on to each other,” she added.
Headline inflation in May peaked at 6.1% for the region, down from 7% in April. But the ECB’s target is to bring inflation down to 2%.
The euro area faced higher inflation rates mainly after Russia invaded Ukraine, which drove up energy costs across the bloc. However, those have dissipated in recent months, and the most significant price jumps have been in food products instead.
“We have made significant progress but faced with a more persistent inflation process, we cannot waver, and we cannot declare victory yet,” she added.
The ECB has raised rates since July 2022, amounting to 400 basis points. Market players have priced in another rate increase next month and are considering another move for September.
Some economists are also raising questions about when the ECB might have to reverse this tighter policy as they fear that higher rates will slow the economy considerably. However, Lagarde suggested Tuesday that it is too early to make such considerations.
“We need to communicate clearly that we will stay at those levels for as long as necessary’. This will ensure that hiking rates do not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialize,” she said.
“It is unlikely that shortly, the central bank will be able to state with full confidence that the peak rates have been reached. This is why our policy needs to be decided meeting by meeting and has to remain data-dependent.”
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