Christine Lagarde, the President of the European Central Bank, has indicated that the bank is likely to raise interest rates by 50 basis points in their March decision, continuing their efforts to combat inflation.
Their last monetary policy meeting suggested this decision, and recent economic data has confirmed its likelihood. The proposed move would mark the ECB’s sixth rate increase since July 2021, bringing the total increase to 350 basis points.
Despite the anticipated rate hike, it is uncertain what the future holds beyond March 16th. Some officials have suggested that another half-point hike may be necessary for May, and investors are predicting a 4% rate peak compared to the current deposit rate of 2.5%.
Lagarde has acknowledged that higher rates are inevitable, but she cannot provide an exact estimate of how high they will go. She noted that the bank still has work to do to combat inflation and is progressing towards achieving its goals.
European Central Bank’s projection for the growth of the economy
The ECB’s decision to raise interest rates comes in response to inflation exceeding the bank’s 2% target, with the underlying rate at a record high. The move is intended to reduce spending and slow down the economy, which should help to curb rising prices. However, a rate hike can also slow economic growth and potentially harm the recovery from the pandemic.
The ECB’s decision to present new economic forecasts after the next rate decision indicates that the bank is closely monitoring economic developments and is prepared to make adjustments to its policies as needed. Despite the uncertainty surrounding the future path of interest rates, the ECB is committed to taking appropriate measures to ensure price stability and maintain its mandate to support the economy of the Eurozone.
Christine Lagarde expressed confidence that headline inflation will decrease in 2023, while core inflation will remain stubborn in the short term. She also expects somewhat better economic growth compared to the stagnation experienced in the last quarter of 2022. However, she acknowledged significant uncertainty regarding economic developments in the coming year.
Lagarde stated that the ECB staff’s projections do not include a recession in 2023 and instead anticipate positive growth and increased activity throughout the year. Nevertheless, she acknowledged the presence of significant uncertainty.
Regarding concerns about the potential impact of rate hikes on economic growth, Lagarde emphasised that the ECB’s primary focus is on combating inflation. She clarified that the bank’s goal is not to harm the economy but to control inflation.