The President of the European Central Bank (ECB), Christine Lagarde, delivered a compelling speech at the European Parliament in Strasbourg, France on February 15, 2023. During a panel discussion at the ECB’s annual policy conference in Sintra, Portugal, Lagarde, along with U.S. Federal Reserve Chair Jerome Powell, Bank of England Gov. Andrew Bailey, and Bank of Japan Gov. Kazuo Ueda, expressed their unwavering commitment to their strict interest rate increases in the face of persistent inflation. They emphasized that borrowing costs would remain high until inflation is under control.
Lagarde emphasized the need for persistence in tackling inflation, stating that they must be resolute and determined to achieve their targets. Powell echoed her sentiment, stating that the current policy measures have not yet been restrictive enough for a sufficient period of time. The central bankers attributed the rise in inflation to a strong job market, with Powell highlighting the 1.7 job openings per unemployed person in the U.S., and Bailey describing the U.K. labor market as “very, very robust.”
The central bankers acknowledged the risk of a wage-price spiral, where businesses pass on higher labor costs to consumers in the form of increased prices. However, they assured that this scenario has not yet materialized. They also recognized that while global economic growth has been weak and Europe’s economy has experienced two consecutive quarters of contraction, the low unemployment rates provide reassurance against a true recession.
Despite the potential risks, the central bankers affirmed their intention to maintain high interest rates for an extended period, longer than what is anticipated by the stock and bond markets. They emphasized that a sustained inflationary environment requires a longer response. This commitment is reflected in the fact that nearly 95% of central banks worldwide have raised rates since early 2021, the most significant synchronised tightening of monetary policy in decades, according to the Bank for International Settlements.
The central bankers acknowledged the challenges associated with combating inflation and raising interest rates. They noted the potential impact on banks, particularly those unaccustomed to higher rates, as evidenced by the collapse of Silicon Valley Bank and other U.S. banks. Additionally, rising mortgage rates could lead to falling home prices and financial strain for those with adjustable-rate mortgages.
Giorgia Meloni, the Italian Premier, expressed skepticism towards the central banks’ approach to inflation, arguing that raising interest rates may have more detrimental effects on economies than inflation itself. Nevertheless, the central bankers affirmed their determination to bring inflation back down to their targets, emphasizing that the consequences of not doing so would be more severe.
In conclusion, the central bankers’ message is clear: they will persist with their aggressive interest rate increases until inflation is under control. While they acknowledge the potential risks and challenges, they firmly believe that the long-term consequences of not tackling inflation outweigh the short-term pain associated with their actions.
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Omprakash Tiwary is a business writer who delves into the intricacies of the corporate world. With a focus on finance and economic landscape. He offers readers valuable insights into market trends, entrepreneurship, and economic developments.
