The European Central Bank (ECB) will keep interest rates “high enough for as long as it takes” to bring inflation down to the target of 2 percent. Christine Lagarde, the president of the ECB, said this on Friday during the annual central banking conference in Jackson Hole, Wyoming.
Inflation may prove persistent because of fundamental changes in the way the global economy functions, Lagarde said. Those changes could lead to greater volatility in inflation and continued price pressure, she warned in her first statement. speech to the annual conference in Jackson Hole since she took office as ECB President in 2019.
She cited increasing flexibility in the labor market, the energy transition and growing protectionism as examples of those changes.
“That paves the way for bigger relative price shocks than we saw before the pandemic,” said Lagarde. “Whether all these various shifts will prove permanent is not clear at this stage. But it is already evident that its effects are in many cases more persistent than we initially expected.”
However, apart from an “unshakeable promise” that “we must and will keep inflation at 2 percent over the medium term,” Lagarde gave no direct hints on the burning question of whether the ECB will make a tenth straight rate hike at its September meeting, or whether will take a break.
Increasing concerns
ECB policymakers are increasingly concerned about the deteriorating growth outlook, Reuters reports. While the debate is still ongoing, pressure is growing for a pause in rate hikes, the news agency said, citing sources with direct knowledge of the discussion.
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The ECB has raised interest rates at each of its past nine meetings to fight inflation, most recently on July 27. Then the bank left its options open for the next meeting in September, with policymakers split between a pause and further tightening.
Talks with eight policymakers in Europe and on the sidelines of the Jackson Hole symposium, according to Reuters, show that the camp is growing for a break. This is mainly due to the fact that the main economic indicators of the past six weeks have fallen short of expectations. Those indicators suggest that a recession is a real possibility.
Lagarde has said little about whether eurozone rates will be hiked again, and if so, when – other than to say the decision will be based on economic indicators. On Friday, she said that despite pessimism from some, economic growth in Germany is “not broken” and showing resilience.
Her colleague Jerome Powell, the chairman of the US Federal Reserve, increased the pressure on Friday by stating that inflation in the United States is still too high. That is why the US central bank is prepared to raise interest rates even further, he said. According to Powell, interest rates will not fall for the time being.