Christine Lagarde, president of the European Central Bank (ECB), speaks during the Institute of International Finance (IIF) annual membership meeting in Washington, DC, US, on Wednesday, Oct. 12, 2022. This year's conference theme is "The Search for Stability in an Era of Uncertainty, Realignment and Transformation." The ECB president’s assessment jars with that of economists. According to Bloomberg’s survey of forecasters, the euro zone will contract both in the current quarter and in the first three months of 2023.
Lagarde also said that wages -- which are closely watched by central bankers -- have so far avoided staging so-called second round effects that would threaten entrench elevated inflation for longer.
The German government said Wednesday that the energy crunch will probably trigger a contraction next year for the third time since the financial crisis, with output shrinking by 0.4%.
Dutch Governing Council member Klaas Knot said earlier on Bloomberg TV that the ECB needs at least two more “significant” interest-rate increases to reach a level that neither restricts nor stimulates the economy. Some officials have signaled a preference to repeat last month’s 75 basis-point increase when officials next decide on policy on Oct. 27.
Lagarde said rate increases are the ECB’s most effective tool at the moment, though she also confirmed that discussions about reducing the central bank’s balance sheet have started and will continue.