European Central Bank (ECB) President Christine Lagarde has tempered market expectations in a Berlin conference. While many expected interest rate cuts, Lagarde stated that it’s not the time to celebrate victory in the fight against inflation. On the contrary, she warned that a slight increase in inflation can be expected in the coming months, ruling out rate cuts and leaving room for possible new hikes.
Lagarde: Prudent Decisions to Ensure Restrictive Monetary Policy
Lagarde emphasized the importance of being vigilant and focused on the risks of persistent inflation. She stated that future decisions of the ECB will ensure that policy rates remain sufficiently restrictive for the necessary time. The central banker ruled out a softening of monetary policy in the short term, stating that vigilance is required until there is concrete evidence for a sustainable return of inflation to the target.
Forces Influencing Price Dynamics: Lagarde Warns of Uncertainty
Lagarde listed various forces influencing price dynamics, including the absorption of past energy shocks, the strength of monetary policy transmission, wage dynamics, and inflation expectations. She stressed the importance of remaining focused on bringing inflation back to the target, avoiding premature conclusions based on short-term developments. Uncertainty is high, and the ECB has maintained interest rates at current levels, with doors open to new hikes if necessary.
Isabel Schnabel Highlights the Persistence of Inflation Risks
Lagarde’s words were followed by Isabel Schnabel, a German member of the ECB’s Board. Schnabel stated that long-term inflation expectations still signal risks, and the disinflation process will take time. She expects inflation to accelerate again, attributing the persistence to the strength of the labor market and elevated service prices.
Risks on Mortgages: Lagarde and Monetary Policy Endanger 500,000 Contracts
Governor Lagarde announced a restrictive monetary policy, warning that rates will remain high for several quarters to avoid a second wave of inflation. However, this could jeopardize around 500,000 mortgage contracts worth approximately 60 billion euros. This particularly affects low and middle-income families, with possible increases in real estate auctions in 2024.
Inflation and Monetary Policy: ECB at a Crossroads
According to Lagarde, the inflation trend depends on various factors, and monetary policy must be adjusted accordingly. However, ECB decisions seem oriented towards a restrictive monetary policy, with potential impacts on mortgages and real estate prices. While expressing concern about inflation, the ECB will need to carefully balance the risk of recession stemming from overly restrictive monetary policy.
Conclusions: ECB Facing Tough Choices and Economic Challenges
The ECB is grappling with the dilemma of maintaining a restrictive monetary policy to contain inflation and the risk of compromising economic stability and the real estate sector. While Lagarde advises caution, the persistence of inflation risks and potential impacts on mortgages add further challenges. Monetary policy will be crucial in the coming months, with the ECB tasked with finding a delicate balance between economic stability and inflation control.