The European Central Bank will quickly take additional measures if high inflation persists and rubs off on medium-term expectations, its president Christine Lagarde warned on Friday.
Between July and October, the guardian institution of the euro raised its rates by 2%, unheard of in its history. It has thus shown its determination to bring down inflation, which exceeds 10% in the euro zone, essentially driven by energy prices.
But “if we were to see, for example, inflation becoming more persistent and expectations risk becoming unanchored”, i.e. settling above the 2% target, then “we could not wait for the full impact of policy measures to materialize,” Christine Lagarde said in a speech in Tallinn, Estonia.
“We would need to take additional steps until we are more confident that inflation will return to target in a timely manner,” she added.
Ms. Lagarde suggests that rates could continue to rise beyond the so-called “neutral” level, which neither penalizes nor favors activity and which is in the process of being reached in the months to come.
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The ECB wants at all costs to fight inflation fueled by the effects of Russia’s armed invasion of Ukraine and to prevent inflation from taking root in the economy. But its measures aimed at reducing demand could further accentuate the recession that is looming in the euro zone.
“Although recent data on GDP growth have surprised on the upside, the risk of recession has increased,” acknowledged the former economy minister.
But the scenario of a “modest recession”, if it materializes as expected at the turn of 2023, will be insufficient to “tame inflation”, she warned Thursday at a forum organized in Riga by the Bank of Lithuania.