“The longer the war lasts, the greater the costs are likely to be,” European Central Bank President Christine Lagarde said Wednesday in Cyprus. She reiterated that any increases in record-low interest rates will be gradual, describing “significant risks to growth” and “considerable uncertainty” over the economic outlook.
ECB officials have dismissed talk of stagflation, saying expansion in the 19-member euro zone will still top 2% even in their “severe” scenario for 2022. But the latest data show increasing traction for the forces that would produce such an outcome. What’s more, several policy makers are pushing for a rate hike this year that could weigh on output.
Slovakia’s Peter Kazimir on Wednesday joined a growing group of policy makers saying a rate increase in 2022 is possible. Estonia’s Madis Muller said an increase is “likely,” if not definite.
“We’ve reached a point where there’s no longer a need for the central bank to give additional support to the economy via asset purchases and actually it’s right to ask whether such low interest rates are still appropriate,” Muller said in an interview.
Austria’s Robert Holzmann — one of the Governing Council’s leading hawks — backed quarter-point moves in September and December.
Elsewhere, Ireland’s Gabriel Makhlouf said that while monetary policy won’t be normalized rapidly, the ECB will take whatever actions are needed to achieve price stability. Belgian central bank chief Pierre Wunsch also said he favored a gradual approach.
At its March meeting, the ECB indicated that its primary focus is on tackling inflation that’s almost three times the 2% official target. Investors are looking carefully at prices too, reacting to Wednesday’s unexpectedly large jump in Spain by bringing forward bets on the central bank’s deposit rate returning to zero to October from December.
Germany data released later Wednesday showed inflation reached 7.6%, with a national gauge hitting the highest level since records began after reunification in the early 1990s and a government adviser warning double-digit figures may be in store.
They’ve already arrived in Lithuania, where a preliminary reading indicated that prices shot up by 15.6% this month.
Everything will feed through to Friday’s inflation number from the euro zone, where analysts predict a new record in the single currency’s history.
Looking ahead, energy costs, food prices and persistent bottlenecks “are likely to take inflation higher,” according to Lagarde, who called for a European plan to ensure investments — public and private — come online as quickly.
“The best way that monetary policy can navigate this uncertainty is to emphasize the principles of optionality, gradualism and flexibility,” she said.