Continuing gloomy economy: Lagarde wants to keep interest rates high for as long as necessary

Continuing gloomy economy
Lagarde wants to keep interest rates high for as long as necessary

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Recently, the European Central Bank increased key interest rates again due to record inflation. Financial markets then speculate: the end of the road could have been reached. But ECB boss Lagarde reiterates: The monetary authorities want to take their time.

According to ECB President Christine Lagarde, the latest economic data signals a continued weak economy in the euro area. Lower export demand and the more difficult financing situation slowed growth in the end of the summer quarter, said the head of the European Central Bank (ECB) in the European Parliament’s Economic and Monetary Affairs Committee.

She reiterated that the ECB would keep interest rates high for as long as necessary to curb inflation. “Inflation continues to decline. However, it is still expected to remain too high for too long,” said the Frenchwoman.

In the medium term, the central bank is aiming for annual inflation of two percent. But it is still a long way from that at the moment: inflation in the euro area was 5.2 percent in August. In the fight against inflation, the ECB recently raised interest rates for the tenth time in a row. The deposit rate, which sets the trend in the financial market and which commercial banks receive from the central bank for parking excess funds, rose from 3.75 to 4.00 percent. This is the highest level since the start of the monetary union in 1999.

Lagarde reiterated to the parliamentary committee that, according to current assessments, the Euro Central Bank’s decision had made a sufficient contribution to bringing inflation back to the target level in a timely manner. After the latest interest rate hike, the financial markets are speculating that the end of the road may have been reached. At the same time, Lagarde gave a rather gloomy economic outlook and did not promise an upturn before 2024.

Prospects for the eurozone remain bleak

ECB Director Isabel Schnabel currently does not see the declining money supply as a signal of easing inflation in the euro zone. The current unusual development is “probably not a harbinger of a deep recession, but rather reflects a significant reallocation of portfolios after a long period of low interest rates,” she said at a lecture in Regensburg. “Therefore, there is still no all-clear for the inflation problem.”

The M1 money supply – which includes cash and deposits in checking accounts – shrank by more than nine percent in July compared to the same period last year. According to economic textbooks, the less money available in the short term, the lower the risk of inflation. However, a lot of freely available money can be quickly put into consumption, potentially driving up prices. In view of rising interest rates, many savers are currently redeploying their money.

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