European Central Bank President Christine Lagarde warned Tuesday it was too soon to declare victory over eurozone inflation, warning that more interest rate hikes were on the way. File photo by Erik Ss. Lesse/EPA-EFE
June 27 (UPI) -- European Central Bank president Christine Lagarde signaled Tuesday that interest rates in the eurozone will continue to rise to combat "too high" inflation that was in danger of becoming embedded in the 20-country bloc.
Inflation has fallen to 6.1% from a peak of 10.6% but getting inflation down to the bank's 2% target would require raising rates to "sufficiently restrictive" levels and keeping them there "for as long as necessary", Lagarde told an ECB central banking forum in Portugal.
But Lagarde warned that the changing nature of the inflation impacting the countries that use the euro meant both elements hinged on uncertainty about the persistence of inflation and about the strength of the pass-through of monetary policy to inflation, Lagarde said.
"Setting the right 'level' and 'length' will be critical for our monetary policy as we continue our tightening cycle."
Lagarde indicated the central bank, which hiked its main policy rate by 25 basis points to 4% two weeks ago, was not done saying it was committed to reaching its 2% inflation goal "come what may."
"We have made significant progress but -- faced with a more persistent inflation process -- we cannot waver, and we cannot declare victory yet," she said.
"We are seeing a decline in the inflation rate as the shocks that originally drove up inflation wane and our monetary policy actions are transmitted to the economy. But the pass-through of those shocks is still ongoing, making the decline in inflation slower and the inflation process more persistent."
Lagarde said the persistence was the result of inflation working its way through the economy in phases, as different sectors tried to pass higher costs on to each other, a dynamic which had to be tackled to avoid a "self-fulfilling spiral fed by a de-anchoring of inflation expectations."
"We need to communicate clearly that we will stay 'at those levels for as long as necessary'. This will ensure that hiking rates does not elicit expectations of a too-rapid policy reversal and will allow the full impact of our past actions to materialize," she said.
Largarde's stance is backed by International Monetary Fund President Kristalina Georgieva who urged the ECB to keep rates sufficiently restrictive to rein in consumer inflation due to increased uncertainty with risks "skewed to the downside for growth and to the upside for inflation."
