Christine Lagarde on inflation: high interest rates “as long as necessary”

“While progress is being made,” he said, “the fight against inflation is not yet won.”

Lagarde’s comments, at an annual conference of central bankers in Jackson Hole, Wyoming, came against the backdrop of the ECB’s efforts to manage a stagnant economy with still-high inflation. The central bank has raised its benchmark rate from -0.5% to 3.75% in a year, the fastest pace since the euro was launched in 1999.

Rate increases have made it more expensive for consumers to borrow to buy a home or car or for businesses to borrow to expand and invest. Inflation in the 20 countries that use the euro has fallen from a peak of 10.6% last year to 5.3%, largely reflecting sharp falls in energy prices. But inflation is still above the ECB’s 2% target.

Most of Lagarde’s speech focused on disruptions in the global and European economies that could require higher rates for longer than expected before the pandemic. Those challenges include the need to boost investment in renewable energy and address climate change, the rise in international trade barriers since the pandemic, and the problems created by Russia’s invasion of Ukraine.

“If we also face shocks that are bigger and more common – like energy and geopolitical shocks – we might see companies pass through cost increases more consistently,” Lagarde said.

His speech followed the previous Friday’s speech in Jackson Hole by Federal Reserve Chairman Jerome Powell, who similarly said the Federal Reserve was prepared to raise rates further if US growth remained too strong to cool. inflation.

The double whammy of still-high inflation and rising rates has brought the European economy to the brink of recession, although it did manage to expand by 0.3% in the April-June quarter compared to the first three months of the year. .

Lagarde had previously made no commitment on whether the ECB would raise rates at its next meeting in September, although many analysts expect her to skip a rate hike due to the weak economy.

On Friday, most of his speech focused on whether long-term economic changes will keep inflation pressures high. He noted, for example, that moving away from fossil fuels “is likely to increase the size and frequency of energy supply shocks.”

Lagarde said the ECB is trying to develop more forward-looking approaches to its policy to manage the uncertainty created by these changes, rather than relying solely on “look-ahead” data.

Still, he reiterated his support for the ECB’s 2% inflation target.

“We don’t change the rules of the game halfway,” he said.