The European Central Bank (ECB) should continue to raise interest rates into the future, bank president Christine Lagarde said in a 27 June statement at a financial conference in Portugal.
“Barring a material change to the outlook, we will continue to increase rates in July,” she added.
By raising interest rates eight times in the last 12 months—from -0.5 to 3.25 percent—the ECB has “made significant progress” in beating back inflation but “cannot declare victory yet,” Lagarde stated.
Eurozone inflation figures released 30 June show overall inflation at 5.5 percent, dropping sharply from May’s rate of 6.1 percent. Core inflation, which ignores energy and food prices, edged up from 5.3 percent in May to 5.4 percent last month.
Since the COVID War ended, Europe’s economy has been battered by “overlapping inflationary shocks,” according to Lagarde. As commodity prices began to settle back, wages continued to rise, with workers’ pay forecast to rise 14 percent over the next 18 months.
Because workers are demanding higher pay to recoup income lost to inflation, “we will face several years of rising nominal wages, with unit labor cost pressures exacerbated by subdued productivity growth,” she said.
“Under these conditions, it is unlikely that in the near future the central bank will be able to state with full confidence that peak [interest] rates have been reached.
“While we do not see a wage-price spiral or a de-anchoring of expectations, the longer inflation remains above target, the greater these risks become,” Lagarde warned.
The ECB’s target inflation rate is 2 percent.
Lagarde’s comments were “senseless and harmful,” Matteo Salvini, Italy’s deputy prime minister said in a public statement. Italy is carrying an especially high load of debt as a result of the COVID War.
Raising interest rates yet again “means putting businesses in trouble,” foreign minister Antonio Tajani said in his public comments. “If rates are too high, we risk a recession.”
TREND FORECAST: ECB officials have said they would tolerate a mild recession if it meant bringing inflation to heel.
In fact, The European Union is already in recession after reporting two consecutive quarters of negative economic growth. Again, as we had forecast, it will be a busy travel season that will boost much of Europe’s GDP in the next two months, but when autumn arrives the economy will cool down and the higher interest rates rise, the deeper the EU will fall into recession.
The bank risks overcorrecting. After being oblivious to inflation’s initial danger, Lagarde and her colleagues are likely to be overly zealous in taming it now.
TREND FORECAST: If the bank had begun edging interest rates up in tandem with inflation, rising prices very likely would have been brought to heel by now.
Instead, as we wrote in “ECB Fears Inflation Will Last For Years” (12 Oct 2022), Lagarde said in November 2021 that it would be “wrong” to raise interest rates then because inflation will begin to cool by the time the new rates would have a chance to impact the economy.
On 3 December 2021, she told the Financial Times that inflation was peaking and that the inflation profile looked “like a hump…and a hump eventually declines.” She said at the time that the ECB is “very unlikely” to alter its interest rate—which by then had remained negative for seven years—in 2022.
The energy crisis created by the Ukraine war and Western sanctions will prolong not only inflation, but also the continent’s recession, realizing the ECB’s fears that inflation will become embedded across the economy for the long term.
Bank officials also have failed to acknowledge their responsibility for creating rampant inflation by keeping the bank’s interest rates negative for eight years, buying baskets of corporate and government bonds, and printing trillions of invented euros to fight the COVID War.