A recession in Europe brought on by painfully high energy prices and soaring food costs will not have a significant impact on the 19-country Eurozone’s inflation rate, Christine Lagarde, president of the European Central Bank (ECB), said last week in comments quoted by Bloomberg.

“We don’t believe that [such a] recession will be able to tame inflation,” she said.

Lagarde spoke a week after the bank doubled its key interest rate, adding three-quarters of a point to it and boosting it to 1.5 percent.

Inflation across the region reached 10.7 percent in October, the European Commission reported, a higher rate than the bank had expected.

Seven of the ECB’s 25 members of its governing council spoke at various forums last week, revealing a divergence, and sometimes a conflict, of views.

While Lagarde says she doubts the region will enter a recession, Martins Kazaks, governor of Latvia’s central bank, predicted one will occur within a few months.

As a result, the ECB must continue to raise rates “significantly,” even if that causes a recession, he said at an event in Riga.

“In my view, a recession in the euro area is a baseline scenario, but it’s likely to be shallow and brief and, hence, insufficient to break the backbone of inflation,” he added.

“It is clear that interest rates will rise much higher to bring inflation down to our 2-percent target medium term,” he said.

“There’s no need to pause at the turn of the year,” he contended. “Rate increases must continue into the next year until inflation, especially core inflation, shows a visible slowdown.”

However, the bank’s rapid and unrelenting series of rate increases will pose economic dangers, Fabio Panetta, an ECB director, noted.

In contrast, Joachim Nagel, president of Germany’s Bundesbank, agreed with Kazaks.

“Political pressure might increase over time as long as we’re in this process of hiking rates,” German central bank president Joachim Nagel told an audience in Madrid. “We shouldn’t refrain from further rate hikes.”

He does not foresee a recession in Europe’s future, in part because the Eurozone is in better financial condition overall than it was when the Great Recession struck in 2007, he said.

The Ukraine war and its fallout, not rate increases, are fueling inflation, council member Mario Centene argued. He emphasized the importance of preventing an expectation of permanent inflation from becoming embedded in the public mind.

A 3-percent peak in the ECB’s interest rate, which has been priced in by markets, “is a possibility,” Ignazio Visco, governor of Italy’s central bank, told an online gathering.

He defended what many have seen as the bank’s slow response to inflation and its reticence to raise its interest rate until inflation was roaring.

“I don’t think we started too late,” he said. “Even in September, we were still observing core inflation much below our objectives.”

TRENDPOST: Visco is still trying to defend the indefensible: of course the ECB recognized inflation’s power and magnitude far too late. 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.

And totally absent in their analysis is that the ECB and nations are responsible for inflation by keeping interest rates into negative territory for eight years, buying corporate and government bonds…and printing trillions in fake money to fight the COVID War. 

Making a bad situation they take no responsibility for putting sanctions on Russia that have pushed energy prices to new heights.

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