According to ECB President Christine Lagarde, interest rate hikes are still needed to quell high inflation. In doing so, the European Central Bank follows the example of its US counterpart, the Federal Reserve (Fed). According to Brzeski, this is a conscious choice, even if the ECB is taking smaller steps than the Fed.
“The possibility of it turning into a recession is lurking”
“The European Central Bank has started to fear that the interest rate hikes implemented so far would have a negative effect on the economy,” explains Brzeski. Interest rate measures are being taken to curb inflation, but there is a risk of it turning into a recession, according to the chief economist.
Pause button
However, the ECB is not holding back just yet. Lagarde indicated yesterday, announcing the latest interest rate hike, that the pause button will not be pressed now and for the time being. In it, the ECB president speaks louder than Fed Chairman Jerome Powell. According to Brzeski, Lagarde is trying to present herself as a strong woman for the markets.
‘But everyone knows that the ECB is increasingly among the chairs. On the one hand there is a slowdown in the economy, but on the other hand inflation is still too high. It is getting harder and I think that every successive movement in interest rates means that the possibility of a serious recession increases,” fears the chief economist.
Delay
The ECB is therefore in an extremely difficult position. According to Brzeski, the risk of an increase in inflation in the Eurozone is still high. There are several reasons for this. The war in Ukraine is one of them, but the cycle in Europe also started later than in the United States. It will take some time for inflation to really come down. The tricky thing about politics is that it works with a significant lag.’ The chief economist thinks the ECB will raise interest rates once more in June and then stop to look at the effect of all the interest rate changes to date.