According to Lagarde, the ECB must continue to fight inflation. “It is our ambition at the ECB to bring inflation to the 2% target in the not too distant future.” Lagarde said that the central bank will take all necessary measures to achieve this result.
The markets are down
Most stock prices fell in response to his statements. In Lagarde’s eyes, investors are too optimistic in their belief that inflation has been vanquished. Jos Versteeg, stock analyst at InsingerGilissen, understands Lagarde’s pessimism. ‘I have no idea that inflation has passed so quickly and success in the pocket have.’
According to Versteeg, core inflation in particular, without food and energy prices, is too high. “It’s more than 5 percent. Now we have lower energy costs, but economists do away with that. And what Lagarde is also saying is that there is a severe shortage of jobs, which can put pressure on wages and lead to a wage price spiral.’
Touch your fingers
A tap on Lagarde’s fingers is perhaps a good sign, says Versteeg. ‘A central bank can achieve a lot by talking. When markets become very bullish, financial conditions improve and consumers start spending more. But central banks actually want to slow down the economy.
The ECB has now raised interest rates four times. In total, interest rates increased by 2.5 percentage points. Interest rates are expected to rise by 0.5 percentage point in February. Eurozone inflation was 9.2% year-on-year in December. In October, inflation peaked at 10.6%.
French central bank president François Villeroy de Galhau said on Wednesday that the ECB should raise interest rates by half a percentage point next month. Klaas Knot of De Nederlandsche Bank also said that such an increase in interest rates is necessary.
“Many economists expect further interest rate hikes towards 3.25% in the spring, and I think interest rates will stay high for a longer period of time,” Versteeg says. ‘And I agree with you, price stability is the most important thing to push inflation out. It hurts, but we have to take it for granted.’