JACKSON HOLE, Wyoming (AP) — Interest rates in the European Union will need to stay high “as long as necessary” to slow still-high inflation, Christine Lagarde, president of the European Central Bank, said Friday.
“While progress is being made,” she said, “the fight against inflation is not yet won.”
Lagarde’s remarks, at an annual conference of central bankers in Jackson Hole, Wyoming, came against the backdrop of the ECB’s efforts to manage a stagnating economy with still-high inflation. The central bank has raised its benchmark rate from minus 0.5% to 3.75% in one year — the fastest such pace since the euro was launched in 1999.
The rate hikes have made it more expensive for consumers to borrow for the purchase a home or a car or for businesses to take out loans to expand and invest. Inflation in the 20 countries that use the euro has dropped from a peak of 10.6% last year to 5.3%, largely reflecting sharp drops in energy prices. But inflation still exceeds the ECB’s 2% target.
Most of Lagarde’s speech focused on disruptions to the global and European economies that might require higher rates for longer than was expected before the pandemic. Those challenges include the need to boost investment in renewable energy and address climate change, the rise in international trade barriers since the pandemic and the problems created by Russia’s invasion of Ukraine.
“If we also face shocks that are larger and more common — like energy and geopolitical shocks — we could see firms passing on cost increases more consistently,” Lagarde said.
The double blow of still-high inflation and rising rates has pushed Europe’s economy to the brink of recession, though it eked out a 0.3% expansion in the April-June quarter from the first three months of the year.
Lagarde has previously been noncommital on whether the ECB would raise rates at its next meeting in September, though many analysts expect it to skip a rate hike because of the economy’s weakness.
On Friday, most of her speech focused on whether longer-term economic changes will keep inflation pressures high. She noted, for example, that the shift away from fossil fuels is “likely to increase the size and frequency of energy supply shocks.”
Lagarde said the ECB is seeking to develop more forward-looking approaches to its policy to manage the uncertainty created by these changes, rather than relying solely on “backward looking” data.
Still, she reiterated her support for the ECB’s 2% inflation target.