Lagarde says 2022 interest rate hike unlikely but ECB will act if needed

European Central Bank president Christine Lagarde described the current spike in prices as temporary.

European Central Bank president Christine Lagarde called the prospect of an interest rate increase next year unlikely, but said she would quickly take action to combat elevated inflation should it become necessary.

“When the conditions of our forward guidance are satisfied, we will not hesitate to act,” Ms Lagarde said.

Her remarks come just days after data showed euro-area consumer prices shot up 4.9% in November – the fastest rate since the common currency was created – and jumped quicker still to 6% in inflation-averse Germany.

The comments also follow an abrupt hawkish shift from US Federal Reserve chair Jerome Powell, who suggested this week that the word “transitory” should no longer be used to describe what’s happening with inflation.

Ms Lagarde described the current spike in prices as temporary and said it wasn’t appropriate to compare Europe to the US. Inflation is likely to slow next year, when the impact of a 2020 cut in Germany’s sales-tax fades and upwards pressure on energy costs eases, she said.

“A hump eventually declines, and this is what we project for 2022,” Ms Lagarde said. “We believe that we are now at the high level of the hump and that it will start declining.”

Inflation soared to record high

Lagarde's comments come after inflation in the 19-country currency bloc soared to a record-high 4.9% last month, more than twice the ECB's 2% target. Indicators suggest it will only fall below that mark in late 2022 at the earliest.

She said the ECB may set policy for a relatively short period at this month's meeting given heightened uncertainty but should not delay a decision as markets need direction.

Conservative policymakers have called on the ECB to avoid making long-term commitments in December given recent inflation and a resurgence of the coronavirus pandemic, including the emergence of the Omicron variant.

"There are ways to give clarity without making long-term commitments and I would err on the side of not making [a] very long-term commitment because there is too much uncertainty," Lagarde said.

"But equally, we need to very clearly indicate that we stand ready [to act], in both directions." Once conditions for a rate rise are met, she said, the ECB "would not hesitate to act".

The December 16 meeting will be the most crucial this year. The eurozone's central bank has already said it will wind down its €1.85trn pandemic emergency stimulus scheme next March and will "recalibrate" other tools to fill the void.

Ms Lagarde would not discuss options for the meeting but said she remained of the view that the Pandemic Emergency Purchase Programme, the ECB's key tool over the past two years, should end, and that interest rates should not rise next year.

• Bloomberg and Reuters