European Central Bank President Christine Lagarde has said interest rates will be increased again, to further slow down the economy and bring down inflation in the long term.
Speaking at the European Banking Congress on Friday (18 November), she also said the “risk of recession” had increased but that this alone will not bring down inflation.
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With inflation in the eurozone at 10.6 percent, Lagarde said further monetary tightening was necessary. But her admission that an economic downturn will not bring down inflation had some economists question the logic of the policy.
“Pretty insane stuff,” philosopher-economist Jens van ‘t Klooster tweeted. “We’re now heading for a central bank-inflicted recession that even on the ECB’s own account will not do much to achieve price stability.”
The bank has already delivered the most aggressive monetary tightening in its history. Increasing rates further risks deepening recession without curing inflation.
“But at least we will have inflicted pain?” Phillipa Sigl-Glöckner, economist and director of Dezernat Zukunft, a German macro-financial think tank, commented after the speech was published.
Explaining the move, Lagarde said higher rates are meant to display the bank’s “commitment” to return to more stable market conditions, a priority for bankers and investors.
Although higher interest rates only direct domestic demand inflation — by the ECB’s own data, most inflation is caused by the disrupted imports, especially food and energy — households and businesses have to believe the central bank is doing everything it can to keep inflation low.
“Our credibility is vital,” Lagarde said, referring to the belief that expectations of future inflation are a key driver of actual inflation.
Inflation expectations are a central tenet of central bank policymaking, but some economists argue people base their expectations on actual economic factors rather than central bank policy announcements.
With the ECB tightening the money supply, it will become harder and more expensive for governments to invest. But governments should not reduce investments in clean energy, Lagarde said.
“Massive investments in renewables are needed” to replace Russian oil and gas, she said.
To cover these expenses, governments should produce “more with less” through innovation and increase taxes, although she did not say what governments should tax.
The ECB’s governing council is scheduled to make its rate decision on 15 December.