Lagarde reaffirms plans to hike ECB’s interest rates

European Central Bank President Christine Lagarde reaffirmed on Monday plans to raise the ECB’s interest rates twice this summer while fighting widening spreads in the borrowing costs of different eurozone countries.

“These decisions underpin our previous commitments to adjust all of our instruments within our mandate, incorporating flexibility if warranted, to ensure that inflation stabilizes at our 2% target over the medium term,” Lagarde told the European lawmakers.

Lagarde also stressed keeping borrowing costs under control for more indebted members of the eurozone was “at the core” of the European Central Bank’s mandate.

Her statement came after an emergency meeting of ECB policymakers last week to address market jitters after the central bank announced its first planned interest rate rise in over a decade.

The watershed moment led to the borrowing costs for eurozone members to climb.

Notably, the spread between the yields on German government bonds and those of more indebted eurozone members – a measure of bond market stress – began to increase.

In response, the ECB pledged “flexibility” and said it would complete the design of a tool to tackle growing differences in borrowing costs.

Controlling the divergence was “right at the core” of the ECB’s mandate of price stability, Lagarde told a European Parliament committee.

Doing so was “a precondition to the proper transmission of monetary policy,” she said. Excessive differences in yields had to be nipped “in the bud,” she added.

“You want to anticipate that and you want to prevent it.”

Lagarde declined to offer details of the tool under construction by the ECB.

The specifics could be unveiled at the central bank’s next regular policy meeting on July 21.

The ECB “intends” to raise its interest rates at the meeting by a quarter-point, Lagarde said, as part of its response to fly-away inflation. The bank may also make another raise in September, she added.

“The calibration of this rate increase will depend on the updated medium-term inflation outlook,” she said.

Consumer prices rose in the eurozone at an 8.1% pace in May, an all-time high for the currency club and well above the ECB’s own 2% target.

Lagarde said that energy and food prices in the region were up 39.2% and 7.5% in May on an annual basis due to the Russia-Ukraine war.

She noted the expectations for the annual inflation rate in the region were 6.8% for 2022, 3.5% for 2023 and 2.1% for 2024.

“In line with our commitment to our 2% medium-term target, the pace at which we adjust our monetary policy will depend on the incoming data and how we assess inflation to develop in the medium term,” she added.

Lagarde’s statement before the European Parliament was in stark contrast to her remarks in 2020 when she said it was not the job of the ECB to “close spreads.”

The slip of the tongue, which ECB officials quickly sought to clear up, led to an increase in borrowing costs for some eurozone members, including Italy.

Lagarde also warned that the risk of an abrupt correction in Europe’s financial and housing markets is high.

“Risks to financial stability have perceptibly increased since the beginning of this year,” she said in her capacity as the chair of the European Systemic Risk Board, the European Union’s financial risk watchdog.

“While the correction in asset prices has so far been orderly, the risk of a further and possibly abrupt fall in asset prices remains severe,” she said.

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