The European Central bank will raise its interest rates until inflation falls back to its 2% target, the ECB's President Christine Lagarde said in an interview with Germany's Funke Mediengruppe published on Friday.
It was Lagarde's strongest commitment to date to fighting inflation, which hit 8.6% in the euro zone last month, despite growing fears of a recession in the bloc as a result of Russia's invasion of Ukraine.
"We will raise interest rates for as long as it takes to bring inflation back to our target," she told the German network of newspapers.
The ECB raised its interest rates for the first time in 11 years on Thursday and guided for more hikes at its upcoming meetings.
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Now, the TPI is, obviously, an instrument that will help us deliver on our mandate of price stability, bringing inflation in the medium term back to 2%, and under that TPI all members of the euro area can be eligible; all of them. You will find in the press release later, after this press conference, the detail of the eligibility conditions, but all members of the euro area are eligible. The Governing Council, in its discretion, in its assessment will determine on the basis of the eligibility criteria, on the basis of the indicators that will signal or not unwarranted, disorderly market dynamics, whether or not a country is eligible and whether it activates the TPI. Voilà.
The European Central Bank has raised interest rates for the first time in 11 years by a larger-than-expected amount, joining steps already taken by other major central banks across the world to target stubbornly high inflation.
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The move, announced on Thursday, raises new questions about whether the rush to make credit more expensive will plunge major economies into recession at the cost of easing prices for people spending more on food, fuel and everything in between.
The ECB’s surprise hike of half a percentage point for the 19 eurozone countries is expected to be followed by another increase in September, possibly of another half a point. The bank's President Christine Lagarde had indicated a quarter-point hike last month.
The bigger hike was justified by an “updated assessment of inflation risks,” the ECB said, and means the bank leaves an era of negative interest rates.
“Economic activity is slowing. Russia’s unjustified aggression towards Ukraine is an ongoing drag on growth," Lagarde said at a news conference following the announcement. “The impact of high inflation on purchasing power, continuous supply constraints and higher uncertainty are having a dampening effect on the economy. Taken together, these factors are significantly clouding the outlook for the second half of 2022 and beyond."
Thursday's decision means the ECB joins the likes of the US Federal Reserve and other major central banks in raising interest rates. The move reflects a rate of inflation that turned out to be higher and more stubborn than first expected, the dubious state of an economy heavily exposed to the war in Ukraine, and a dependence on Russian oil and natural gas.
Recession predictions have increased for later this year and the following year, as soaring electricity, fuel and gas bills deal a blow to businesses and people's purchasing power.
“The economic outlook is worsening by the day," said Carsten Brzeski, chief eurozone economist at ING bank. “At the same time, headline inflation is still increasing and in our view will only come down gradually towards the end of the year, if it comes down at all.
“In hindsight, the very gradual and cautious normalisation process the ECB started at the end of last year has simply been too slow and too late,” he added.
Recession concerns have helped push the euro to a 20-year low against the dollar, which has made the ECB's battle against inflation even harder by worsening already high energy prices. This is because oil is priced in dollars.
Raising rates is seen as the standard cure for excessive inflation, now running at 8.6% in the eurozone in June and largely driven by soaring energy prices. The bank's benchmarks affect how much it costs banks to borrow — and so help determine what they charge to lend.
But by making credit harder to get, rate increases can slow economic growth, a major conundrum for the ECB as well as for the Federal Reserve. The US's central bank raised rates by an outsized three-quarters of a point in June and could do so again at its next meeting. The Bank of England started the march higher in December, and even Switzerland's central bank surprised with its first increase in nearly 15 years last month.
