Christine Lagarde has rejected calls for the European Central Bank to tighten monetary policy more quickly than planned in response to record inflation, saying it had “every reason not to act as quickly or as ruthlessly” as the US Federal Reserve.
Soaring energy and food prices lifted inflation in the eurozone to a record high of 5 per cent in December, well above the ECB’s 2 per cent target. The ECB president, however, predicted that inflation in the bloc would stabilise and “gradually fall” this year.
The Fed and the Bank of England are expected to raise interest rates several times after stopping their asset purchases this year. But the ECB in December said it was “very unlikely” to raise rates this year and outlined plans to continue bond purchases for most of 2022.
“The cycle of economic recovery in the US is ahead of that in Europe,” the ECB president told France Inter radio on Thursday. “So we have every reason not to act as quickly and ruthlessly as one might imagine with the Fed.”
Despite Lagarde’s confidence that inflationary pressures will fade soon, investors are betting that prices will continue to overshoot the ECB’s forecasts and force it to change its policy stance more aggressively than planned this year.
Markets are now pricing in two 0.1 percentage point interest rate rises from the ECB by the end of the year, despite the central bank’s insistence that higher borrowing costs in 2022 are not consistent with its guidance.
After Germany’s 10-year bond yield — which acts as a benchmark for borrowing costs in the euro area — turned positive on Wednesday for the first time since 2019, Lagarde said rising yields meant “the fundamentals of the economy are recovering”.
Critics argue the ECB is being too slow to remove its monetary stimulus because of fears this will push up borrowing costs for governments that have borrowed significantly during the coronavirus pandemic.
Three German economists — Jürgen Stark, Thomas Mayer and Gunther Schnabl — wrote in a Project Syndicate article this week: “It is becoming increasingly clear that inflation will gain momentum without monetary policy countermeasures”. But they added: “Such tightening would create serious problems for highly indebted eurozone members.”