High Inflation Remains ECB's Main Worry
Two key policymakers of the European Central Bank warned on risks posed by high inflation and signaled that they are not done with raising interest rates despite the latest banking crisis that has put the aggressiveness of central banks in tightening policy under doubt.
“With high uncertainty, it is even more important that the rate path is data-dependent,” ECB President Christine Lagarde said in her speech at the ECB Watchers conference on Wednesday.
“This means, ex ante, that we are neither committed to raise further nor are we finished with hiking rates.”
The ECB raised interest rates by 50 basis points last week.
Lagarde stressed on the need for a “robust strategy” going forward due to high inflation and the increased uncertainty surrounding its future path.
The central bank has already raised interest rates by 350 basis points since July last year.
The ECB chief expects the level of uncertainty to remain high due to overlapping shocks and shifting geopolitics.
Core inflation in the single currency bloc hit a record high 5.6 percent in February.
Underlying inflation measures such as Supercore, which the ECB defines as the rise in prices of items sensitive to the business cycle, or those that capture items with low import content continues to strengthen, Lagarde noted.
“If this continues and aggregate demand picks up from its current compressed levels, we could see a handover from imported to domestic price pressures that keeps overall price pressures high,” the ECB chief warned.
Lagarde said the development in wages will be key to determine which of these forces wins out.
Elsewhere on Wednesday, ECB rate-setter and Bundesbank chief Joachim Nagel said policymakers needs to be more stubborn against the stubbornly high inflation.
In an interview to the Financial Times newspaper, Nagel said, “There’s still some way to go, but we are approaching restrictive territory.”
However, once the ECB stopped raising interest rates policymakers will have to resist calls to cut them, causing inflation to “flare up again” like what happened during the oil supply shocks of the 1970s, Nagel said.
Nagel also said that price pressures were strong and broad-based across the economy.
Meanwhile, both Lagarde and Nagel expressed confidence that the ECB was well equipped to handle the latest banking crisis.
Source: Read Full Article