The European Central Bank (ECB) will take a “robust” approach that allows it to respond to inflation risks as needed but also aid financial markets if threats emerge, according to president Christine Lagarde.
“Bringing inflation back to 2 per cent over the medium term is non-negotiable,” she told a conference of ECB watchers in Frankfurt, Germany, on Wednesday. “We will do so by following a robust strategy that is data-dependent and embeds a readiness to act but that does not entertain trade-offs around our primary objective.”
The ECB president built on remarks to lawmakers on Monday, pledging support to the financial system if necessary but also holding a steady gaze on consumer-price risks that she insists have not yet shown any signs of dissipating amid recent global market turmoil.
“We do not see clear evidence that underlying inflation is trending downwards,” she said. While “falling energy prices are weakening a key driver” of such pressures, Ms Lagarde added that “increasing domestic price pressures could offset some of this disinflationary impulse”.
The president repeated language used at the decision last week that if the ECB’s “baseline” holds then the ECB will have “ground to cover” in its monetary policy.
Chief economist Philip Lane, speaking at the same event, said that underlying inflation should ease over time, though he ratified Ms Lagarde’s view on rates. “I would agree with the phrasing the president used – if the baseline holds up, absolutely there’s more to do. But we will have lots of time between now and the May decision to look at that.”
Officials raised rates by another half a point on Thursday, extending the most aggressive hiking cycle in its history even as the spectre of a full-fledged banking crisis roiled financial markets. Inflation remains much too high for comfort, policymakers argued, while pledging to do what is needed to ensure the system would not collapse.
“I have made clear that there is no trade-off between price stability and financial stability,” she said on Wednesday. “We have plenty of tools to provide liquidity support to the financial system if needed and to preserve the smooth transmission of monetary policy.”
Bundesbank president Joachim Nagel said in comments published in the Financial Times earlier that the ECB is not done raising rates. “There’s still some way to go, but we are approaching restrictive territory. If we are to tame this stubborn inflation we will have to be even more stubborn.”
In her speech Ms Lagarde said officials will keep a close eye on the banking sector in the next weeks and months to see whether firms are becoming more reluctant to lend. Some economists have suggested that this could be a result of higher funding costs in light of recent turmoil in the sector. “While more restrictive credit conditions are part of the mechanism by which our tightening ultimately reins in excess price pressures and brings inflation back to target, we will make sure that the process will be orderly throughout,” she said. – Bloomberg