Tightening monetary policy to curb inflation could stifle the recovery of the euro zone, says Lagarde

The president of the European Central Bank, Christine Lagardesaid on Monday that tightening monetary policy now to curb the inflation could stifle the recovery of the euro area, and rejected calls and market bets in favor of a monetary politics more restrictive.

With inflation already doubling its 2% target and likely to continue to rise this year, the ECB is coming under increasing pressure to abandon its ultra-lax monetary policy and address price growth that is eroding the purchasing power of consumers. homes.

In his intervention before the legislators of the European UnionLagarde admitted that the rebound in inflation will be greater and last longer than previously thought, but argued that it will fade next year, so acting now would affect the economy just as price growth begins to moderate.

“At a time when purchasing power is already being eroded by rising energy and fuel bills, undue tightening of financing conditions is undesirable and would represent an unjustified obstacle to recovery,” Lagarde said at a hearing in the European Parliament.

“If we took any tightening measure now it could do a lot more harm than good,” he said.

With rising commodity prices and continuing bottlenecks in the supply chain, inflation is proving more difficult than anticipated.

As elsewhere, euro zone bond markets have been quick to bet on higher inflation and the prospect of tighter monetary policy in the coming months.

A key indicator of euro zone inflation expectations is not far behind the ECB’s 2% inflation target, and money markets are forecasting a first rate hike of 10 basis points in September 2022.

Bond yields rose following Lagarde’s comments on Monday.

Lagarde repeated that it is “very unlikely” that the conditions for an interest rate hike in 2022 will be met, but said he could not commit in a similar way for the following year.

“I don’t think I would venture into 2023, but certainly by 2022 I will repeat what I said at the time,” he said.

The CEO of Deutsche Bank, Christian Sewing, disagreed with the idea that inflation was temporary and called on central banks around the world to act.

Inflation reached 4.1% last month and could approach levels close to 4.5% by the end of the year, before a slow decline that will put it back below the ECB target only towards the end of 2022, according to economists.

The ECB expects average annual inflation to fall back below 2% next year, a figure that is probably out of date, as private estimates, together with projections from the European Commission, all point to price growth. greater than 2 percent.