Lagarde insists that interest rates will not rise despite inflation hike                

Lagarde insists that interest rates will not rise despite inflation hike                

ECB President Christine Lagarde believes the ECB does not need to respond as forcefully to inflation as the US Federal Reserve.

The ECB has “every reason” not to respond as forcefully as the US Federal Reserve to soaring consumer prices, according to President Christine Lagarde.

“We’re all in very different situations,” Ms  Lagarde told the France Inter radio station in an interview. Inflation is “clearly weaker” in the eurozone, while the region’s economic recovery is also not as advanced as in the US, she said.

“We have every reason to not react as quickly and as abruptly as we could imagine the Fed might,” Ms Lagarde said. “But we have started to respond and we, of course, stand ready to respond with monetary policy if figures, data, facts, require it,” she said.

The ECB has come under pressure to act after inflation in the currency area hit a record 5% last month. But while officials have agreed to wind down pandemic stimulus, they say an interest-rate increase is highly unlikely this year since the current bout of inflation is driven by supply shocks and a spike in energy costs, and should gradually ease.

Under current conditions and inflation forecasts, “an increase in interest rates is not expected in 2022,” ECB governing council member Pablo Hernandez de Cos told Spanish television broadcaster TVE in a separate interview on Thursday.

Resolve

The US central bank, meanwhile, has signalled that it will start raising rates as soon as March after consumer-price growth reached 7% in December. 

That’s the most in almost four decades and is fueling fears of a cost-of-living squeeze.

Financial markets are testing the ECB’s resolve to wait out the surge in prices, betting on a rate hike as soon as September. 

Benchmark German debt yields also climbed above zero for the first time since before the pandemic. Ms Lagarde didn’t appear concerned when asked about that development. Rising yields mean “the fundamentals of the economy are recovering,” she said. 

“It means there’s confidence in growth and in such conditions rates will increase gradually.”  

“It is quite hard to see how the market will regain confidence that inflation is transitory in the short term, because we’re going to see some quite difficult data over the next few months still,” said Sandra Holdsworth, head of rates at Aegon Asset Management. 

“The market will just remain nervous ahead of the March ECB meeting because they’ll get concerned that the ECB will change policy and perhaps taper quicker just like the Fed did,” she said. 

  • Bloomberg

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