Lagarde admits that prices will remain high “more than expected”, but that they will stabilize throughout the year
The European Central Bank (ECB) remains firm on the roadmap that has marked the last few months. It will gradually withdraw economic stimulus and keep interest rates at a minimum this year. However, the agency is concerned about the persistence of inflation, to the point that its president, Christine Lagarde, assured yesterday that the ECB will review its monetary policies at the meeting it will hold in March and in which they do not rule out raising rates of interest.
Everything seems to indicate that the body will be forced to adopt this decision. Prices in the euro zone set a new all-time high in January and Lagarde admitted that “inflation will be more persistent than we expected”. Given this situation, the Bank of England has already decided to raise interest rates for the second time in two months, to 0.5%, and the Federal Reserve plans to adopt similar measures next month.
As for the ECB, “all the governors of the national banks are concerned – admitted Lagarde -, but our body does not rush into its decisions”. He recognized that, in his balance of risks, inflation occupies an important place. They estimate that, in the short term, prices will continue to skyrocket, due to rising energy prices and the high demand for fuels – responsible for 50% of current inflation. Food prices have also experienced a notable rise, dragged down by the high cost of transport and fertilizers. All in all, the ECB is confident that prices will stabilize throughout the year.
The goal is to reach the rate of 2% based on which the European body makes its decisions on monetary policy. In December, the president of the ECB assured that it was “unlikely” that there would be a rate hike in 2022. In March, however, the institution will review the economic data – with the 2% horizon in mind – and decide on the steps to follow. “When the time comes, we will make the appropriate decisions,” Lagarde said.
moderate growth
For the moment, the ECB trusts the tools it has deployed and ensures that the European economy “continues to recover” from the blow caused by the pandemic. Growth in the first quarter of the year will be “moderate”, due to the uncertainty that, even today, exists about the impact that the new variants of covid could have. Bottlenecks in supply chains and labor shortages will also follow economic activity – reducing growth to 0.3% in the last quarter of 2021.
The agency sees it as likely that economic activity and demand will remain “off” in the coming months, due to the restrictions that affect consumer services such as travel, tourism, leisure and hospitality. “The high cost of energy is affecting household consumption and company profits, which is also limiting,” Lagarde stressed. Material and labor shortages continue to hamper production in certain sectors such as manufacturing.
But there are also reasons for optimism. The ECB expects “strong domestic demand” to consolidate strong eurozone growth in the second half of the year. The labor market is also improving day by day, with a greater number of employed and less and less people affected by the Employment Regulation Files.
“The global recovery and continued support from fiscal and monetary policy also contribute to this positive outlook,” the ECB President noted. In her opinion, fiscal measures and specific structural reforms “remain essential to complement our monetary policy effectively.”
The organism is, in the same way, “vigilant” and ensures that it will be prepared to “adjust” all its tools based on the information at its disposal and having evaluated all the consequences.