Lagarde restates ECB hiking plan as crisis tool takes shape

Christine Lagarde, European Central Bank president.

European Central Bank President Christine Lagarde restated officials’ intention to raise interest rates in July and September, signalling that concerns over financial-market tensions aren’t derailing the fight against inflation. The comments yesterday follow an emergency meeting last week where officials accelerated work on a tool to defend the integrity of the euro region. “We intend to raise the key ECB interest rates by 25 basis points at our July monetary policy meeting,” and hike again in September, she told European Union lawmakers yesterday. Lagarde characterised the decision to develop a crisis measure as one that underpins a previous commitment to keep inflation under control. “We need to be absolutely certain that our monetary policy stance is actually driven to all countries of the euro area,” she said. “It’s right at the core of the mandate.” Officials were forced to act following a blowout of Italian bond yields in the wake of their plan to tighten monetary policy in coming months. The new crisis-fighting tool is likely to feature purchases of debt from more highly-indebted nations. The measure is meant to be finalised before the ECB’s Governing Council next scheduled policy meeting on July 20-21, people familiar with the matter have said. Lagarde said that work is under way, and declined to divulge details on how it’s supposed to function. “Suffice to say that fragmentation will be addressed if the risk of it arises,” she told lawmakers. “And it will be done so with the appropriate instruments, with the adequate flexibility, it will be effective, it will be proportionate, it will be within our mandate. And anybody who doubts that determination will be making a big mistake.” Sharing his view on how the tool should function, Governing Council member Martins Kazaks said in an interview that the ECB “will be on top of it” if action is required, but it must also live with increased volatility on financial markets as it exits from a long period of negative interest rates. The ECB revised down growth forecasts for this year and next at its June meeting, while also expecting significantly faster inflation amid surging costs for energy and food. In her comments on Monday, Lagarde noted that pay pressures are showing mild signs of building. “Wage growth has started to pick up, although it remains moderate,” she said. “We expect negotiated wage growth to strengthen slightly further over 2022 and then to remain above average levels for the projection horizon, supported by tight labour markets, increases in minimum wages and some effects of compensation for the high rates of inflation.” She also expressed confidence that the economy can keep expanding. “Russia’s unjustified aggression toward Ukraine is severely affecting the euro area economy and the outlook is still surrounded by high uncertainty,” she said. “But the conditions are in place for the economy to continue to grow and to recover further over the medium term.” The ECB is planning to raise rates for the first time in more than a decade next month, joining peers around the world in hiking borrowing costs to combat record inflation in the currency bloc. Officials already flagged that the increase in July will probably be a quarter point, while the following move in September could be double that magnitude. The deposit rate currently stands at -0.5%, having been negative since 2014.