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Christine Lagarde hardens ECB’s message on fighting inflation

Adapted from FT

The attention of the markets is drawn towards the annual ECB meeting at Sintra, Portugal. In the context of record high inflation, supply chain disruptions and geopolitical hardships, the outlook of ECB is extremely important.

Christine Lagarde, the ECB President

“Inflation in the euro area is undesirably high and it is projected to stay that way for some time to come. This is a great challenge for our monetary policy”

For the first time since 2011, the ECB intends to begin raising interest rates in July. Lagarde reaffirmed the bank's intention on Tuesday to start with a quarter percentage point hike before making a larger adjustment in September, unless the inflation outlook quickly improves. The bank will also stop purchasing new bonds as of this Friday in reaction to the eurozone's record annual inflation rate of 8.1%, which is quadruple the ECB's 2 percent target.

If Russia continues to restrict its natural gas supply and compels governments to ration energy supplies for industry, economists worry that rising interest rates could tip the eurozone economy into a severe phase of stagflation.

According to Lagarde, high inflation's impact on household purchasing power could reduce demand, put the labor market to the test, and potentially temper the anticipated increase in labor income.

She continued, however, that despite the ECB's earlier this month cut to its growth projections, it still anticipated "positive growth rates due to the domestic buffers against the loss of growth momentum”."

Photo from Hollie Adams/Bloomberg

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