Central Bank warns ‘get used to this’…
Christine Lagarde, president of the European Central Bank, has announced a new hike in interest rates during the first session of the ECB Forum in Sintra, which is ‘dedicated to the role of inflation expectations in monetary policy in the face of multiple supply shocks’.
In a speech today, Ms Lagarde confirmed that “unless there is a substantial change in the inflation outlook,” the central bank will “continue to raise rates in July” and thereafter “as far as needed”.
Yes, inflation is declining, but not quickly enough, she stressed – referring to the fact that now with unemployment at record lows, workers are demanding higher wages to make up for lost purchasing power – threatening to keep push up inflation in a wage-price spiral that the bank must prevent.
Explain reports, in Ms Lagarde’s playbook, the ECB needs to “address the dynamic (of wage-price spiral) decisively” by raising rates as far as needed.
The bank will discourage “expectations of a too-rapid policy reversal” (ie seek to quash countries’ hopes that interest rates will start coming down) and keep rates high for as long as needed, she said.
“We have achieved significant progress, but faced with a more persistent inflationary process, we cannot falter, nor yet declare victory,” she continued.
The three-day congress in Sintra comes, say news reports, “at a time when inflation continues to focus the attention of decision-makers after dominating the debate last year”
It is an annual event, involving central bank governors, academics, policy makers and financial market experts.
For all those who believe the central bank policy of increasing interest rates is ‘the only way’, there are just as many who argue that it isn’t. Economists, for example, warn that the use of interest rate hikes can trigger a recession, as the rise makes it more expensive for firms to expand, which leads to a cutback in investment, ultimately hurting employment and jobs.
Certainly in Portugal, Bloco de Esquerda (the Left Bloc party) means to invite Ms Lagarde “to come to parliament and hear representatives of the people who can no longer afford to pay (mortgage) installments”.
As the Bloco argues, the last interest rate increase came only two weeks ago. Now at 4%, interest rates have not been this high since 2008.
But consensus remains in Ms Lagarde’s court: the pain must continue.
Right now, the goal of wrestling inflation back to 2% is still a long way off, and core inflation which excludes volatile food and fuel prices — is “stubbornly high at 5.3%”, she said.
There are 20 countries that use the euro currency. Inflation percentages in May for the bloc came in at 6.1%, heading down from the peak last October of 10.6%.
