Lagarde sure that the ECB will go "as far as necessary" to return inflation to 2%

He defends that the new anti-fragmentation instrument will allow rates to be raised "as much as necessary"

MADRID, 28 Jun. (EUROPA PRESS) -

The president of the European Central Bank (ECB), Christine Lagarde, assured this Tuesday that the institution is willing to go "as far as necessary" to guarantee that inflation stabilizes in the medium term at the 2% objective and has defended that having a specific tool to combat fragmentation will allow the entity to increase interest rates "as much as necessary".

The Frenchwoman confirmed in her opening speech at the 2022 edition of the central bank forum organized by the ECB in Sintra (Portugal) that the Council and Government will raise rates by 25 basis points in July and will raise them again in September, although then the intensity of the rate increase will depend on the evolution of inflation expectations.

"We will continue on this path of normalization, and we will go as far as necessary to guarantee that inflation stabilizes at our 2% medium-term objective," assured the central banker of the euro zone, which from 2023 will have Croatia as a new member.

In her analysis, Lagarde has acknowledged that inflationary pressures are intensifying and widening, not only reflecting high import prices, as they begin to take hold in the services sector, while low unemployment and labor shortages Along with the recovery, they suggest a rebound in wages of more than 4%, according to the latest forecasts for 2022 and 2023, and 3.7% in 2024, almost double the historical average before the pandemic.

Likewise, Lagarde has warned that there are signs that the supply shocks affecting the economy could last longer and, although it is reasonable to assume that the interruptions in the global supply chain will be resolved gradually, the outlook for energy and raw materials premiums are still "cloudy".

In this way, for the president of the ECB, the optionality assumed in the institution's actions guarantees that monetary policy can react with agility to the incoming data on the economy and inflation expectations and, if uncertainty decreases, re-optimize the policy trajectory as needed.

"This conditional approach to the rate of adjustment of interest rates should not be confused with the delay in normalisation", stressed the Frenchwoman, for whom, given that the ECB's position is based on a clear reaction function, the expectations of interest rates and risk-free rates can be adjusted in advance.

Indeed, Lagarde has warned that there are conditions in which gradualism would not be appropriate, such as where higher inflation threatens to unpin inflation expectations, or there are signs of a more permanent loss of economic potential that limits the availability of resources, which would force the ECB to withdraw its monetary accommodation more quickly.

In this regard, the President of the ECB has reiterated the importance of monetary policy being properly transmitted between the different jurisdictions of the eurozone, for which the central bank, in addition to managing the reinvestment of maturities, has ordered to speed up the design of a new specific instrument to combat fragmentation in the markets of the euro zone.

"The new instrument will have to be effective, as well as proportionate and contain sufficient guarantees to preserve the momentum of the Member States towards a sound fiscal policy," Lagarde pointed out.

In this sense, the French has defended that preserving the transmission of the policy throughout the euro zone will allow rates to "increase as much as necessary".