Lagarde: Interest rates to stay elevated for as long as needed
European Central Bank president Christine Lagarde said borrowing costs will remain high to tame consumer prices.
Shares fell and the interest rates for European governments rose as markets focused on concerns that the European Central Bank will take a long time in cutting interest rates.
The pan-European Stoxx-600 index of Europe's largest companies slid 0.6%, down for a third consecutive session, with travel and leisure firms and household products company shares falling sharply. In Dublin, Ryanair shares fell by almost 2% in the session.
However, German shares are the worst regional performers so far this quarter, down 4.6% compared to the 2.5% fall in Stoxx-600 index.
Interest rates, or yields, on European government bonds rose. The yield on the German 10-year bond rose six basis points to 2.8%. The equivalent interest rate on the 10-year Irish bond increased to 3.2%, while the Italian 10-year bond rose to 4.67%.
Speaking at the European Parliament, ECB president Christine Lagarde has reiterated that borrowing costs will remain elevated for as long as needed to tame consumer prices — even as the economy struggles.
“Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,” Ms Lagarde told MEPs in Brussels.
She didn’t specify how lengthy that period may be, saying only that, “it’s a long race that we are in”.
“We remain determined to ensure that inflation returns to our 2% medium-term target in a timely manner,” Ms Lagarde said, sticking closely to this month’s ECB policy statement that accompanied a 10th straight hike in rates to 4%.
That’s a level that most economists and investors reckon marks the peak in the ECB’s more than yearlong campaign to quash inflation. Some Governing Council have endorsed that assessment, with Spain’s Pablo Hernandez de Cos reiterating that the current level should bring price growth back to the 2% goal if maintained for long enough.
Bank of France governor Francois Villeroy de Galhau said the ECB shouldn’t test the economy “until it breaks” — a hint that the prefers not raising rates any further.
Ms Lagarde, too, acknowledged the pain the ECB’s actions are causing, particularly for the 30% of households that have variable-rate mortgages.
“Our duty is to return inflation back to target in a timely manner,” she said. “The faster it gets there, the more stable prices are, the less painful it will be going forward for both those who invest but also those who have borrowed," she said.
Some officials, though, are less certain that the high point in rates has been reached yet. Bundesbank president Joachim Nagel said last week it’s too soon to make such declarations as inflation remains too elevated and is only forecast to decline slowly.
Meanwhile, Germany’s business outlook improved slightly in September, while remaining at historically low levels as the economy faces another contraction this quarter, according to a key measure from the Ifo institute.
“It’s not falling apart, but it’s not stabilising,” Ifo president Clemens Fuest said. “The Germany economy has difficulty leaving this downturn or stagnation. What we see in the data is a mixed bag,” he said.
After suffering a recession in the six months through March and stagnating in the second quarter, Germany’s economy is probably shrinking again as weak global demand, inflation and higher interest rates weigh on companies and households. That makes it the only large eurozone country whose output is forecast to drop this year.
The scale of Germany’s problems has also intensified concerns about its long-term prospects. Among the challenges are a dwindling workforce, the need to transition away from fossil fuels and an excessive reliance on trade ties with China.
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