The euro zone faces “a great challenge”. The European Central Bank will go “as far as necessary” to fight against “excessively high” inflation, which should remain so “for some time to come”, its president warned on Tuesday.
Christine Lagarde, who was speaking at the opening of the institute’s annual forum in the south of Portugal, in Sintra, sees in the current inflation shock “a great challenge for our monetary policy”, she declared before an audience of central bankers and economists.
The ECB’s ultimate objective is to bring inflation back to a level close to 2%, while the aggregate peaked at more than 8% in May in the euro zone and could rise further in June, according to figures expected on Friday .
The institute is preparing in July, in the face of galloping inflation, to raise its interest rates for the first time in eleven years, once it has ended its debt purchases on the market.
Un « instrument anti-fragmentation »
This prospect has raised the risk of a debt crisis in the euro zone, with growing interest rate differentials demanded of the States of northern and southern Europe to borrow and finance their deficits.
The ECB has recently had to work to reassure investors by announcing preparations for a new “anti-fragmentation instrument” to smooth out the notorious spreads, the rate differentials between countries benefiting from good borrowing conditions and the others .
This new instrument “will have to be effective, while being proportionate and containing sufficient guarantees to preserve the momentum of the Member States towards a healthy budgetary policy”, indicated Christine Lagarde on Tuesday.
Preventing the spreads between sovereign borrowing rates is a prerequisite for the proper transmission of monetary policy in all nineteen countries of the euro zone. Only in this context will it be possible “for rates to rise as much as necessary”, declared the former Managing Director of the IMF.
A risk of recession
The ECB is faced with a dilemma because raising its rates too abruptly could plunge the euro zone into recession, especially since the institute has already significantly lowered its growth forecasts for the next two years. “But we still expect positive growth rates” due to domestic support for the economy, assured the Frenchwoman.
The ECB does not want to be the only actor to act in the storm, which is why the governments, responsible for budgetary policy, “must play their part in reducing the risks”. And this, by providing targeted and temporary support “to the economy, while keeping in view the “viability” of their public finances, concluded Christine Lagarde.