European Central Bank President Christine Lagarde downplayed fears of a eurozone recession on Tuesday, saying her staff is ready to raise rates more quickly if inflation continues to rise.
The annual conference of central bank officials is taking place in Portugal, with the focus on rising consumer prices. The eurozone’s headline inflation rate is forecast to be 6.8 per cent this year, significantly over the ECB’s objective of 2 per cent.
This comes as experts debate whether or not the eurozone will avoid a recession this year. The region’s economy has slowed as a result of an energy crisis, sanctions against Russia, and food poverty, to name a few causes.
“We have markedly revised down our forecasts for growth in the next two years. But we are still expecting positive growth rates due to the domestic buffers against the loss of growth momentum,” Lagarde said Tuesday at the Sintra Forum.
Earlier this month, the European Central Bank held an emergency meeting to announce a new instrument targeted at addressing eurozone fragmentation issues. However, market participants were left with uncertainties about the mechanism’s timing and size.
Investors are concerned about high inflation and have been closely monitoring what the ECB says and does. Investors are also concerned about Europe’s high levels of debt, particularly in Italy, and how a return to tighter monetary policy may constitute a financial burden for these economies.
“If the inflation outlook does not improve, we will have sufficient information to move faster. This commitment is, however, data dependent,” Lagarde added Tuesday.
Erik Nielsen, global chief economist at UniCredit, told CNBC that he does not expect this year’s forum to address differences in public debt levels, but rather to focus on the future of monetary policy.
“Can you really hike interest rates into a recession even if inflation is high? That would be unusual,” he said.
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In early June, the ECB announced its intention to raise interest rates next month and again after the summer. This would almost certainly lift the ECB’s deposit rate out of negative territory, marking a watershed moment for the central bank, which has kept rates below zero since 2014.
However, with the region’s GDP forecast dimming, there are doubts that Lagarde will proceed with several rate hikes. The ECB forecasted a 2.8 percent GDP rate for the eurozone this year in June, but economists are beginning to discuss the possibility of a recession by year’s end as a result of Russia’s invasion of Ukraine and its influence on the global economy.
“There is a very high chance the Fed ends up cutting rate towards, sort of, the end of next year or something, and this is the recession story again,” he said.
“They can’t implement what they are saying, they will do the next one and maybe one more hike but then it is going to be really difficult for them, both in the U.S. a little bit later, and in Europe,” he added.
(Adapted from CNBC.com)