From Sintra, in southern Portugal, the President of the European Central Bank (ECB), Christine Lagarde, announced on June 28 that the Frankfurt-based institute would go as far as necessary to fight against “excessively high” inflation and which should remain so “for some time to come”.
Speaking at the opening of the ECB’s annual forum in front of an audience of central bankers and economists, she considered that the current inflation shock was “a great challenge” for the monetary policy of the institute she chairs. .
The ECB’s objective is to bring inflation back to a level close to 2%, whereas it exceeded 8% in May in the euro zone and could rise again in June, according to figures expected at the end of the week. The institute is preparing in July, in the face of galloping inflation, to raise its interest rates for the first time in eleven years, after ending its debt buybacks on the market.
This prospect has resurrected the risk of a debt crisis in the euro zone, with growing interest rate differentials demanded of the States of Northern and Southern Europe to borrow and finance their deficits. The ECB has recently had to do its best to reassure investors by announcing preparations for a new “anti-fragmentation instrument” to iron out the spreadsor interest rate differentials between countries benefiting from good borrowing conditions and the others.
Christine Lagarde said that this new instrument should “be effective, while being proportionate and containing sufficient safeguards to preserve the momentum of member states towards a sound budgetary policy”. The former Managing Director of the IMF added that this was the condition for allowing “rates to rise as much as necessary”.
But the ECB is faced with a dilemma because raising its rates too abruptly could plunge the euro zone into recession, especially since the institute has already significantly lowered its growth forecasts for the next two years. However, Christine Lagarde says she expects, despite this situation, positive growth rates due to domestic support for the economy.
For the President of the ECB, governments “must play their part in reducing risks”. To do this, she says, they must provide targeted and temporary support to the economy, while keeping in view the sustainability of their public finances.