Lagarde says inflation still too high in euro area, cannot declare victory yet

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European Central Bank President Christine Lagarde said Tuesday that inflation is still too high and it’s still too early for her organization to declare victory over consumer price rises.

Speaking at the Sintra central banking event in Portugal, she said: “Inflation in the euro area is too high and is set to remain so for too long. But the nature of the inflation challenge in the euro area is changing.”

“This persistence is caused by the fact that inflation is working its way through the economy in phases, as different economic agents try to pass the costs on to each other,” she added.

Headline inflation in May came in at 6.1% for the region, down from 7% in April. But the ECB’s target is to bring inflation down to 2%.

The euro area has faced higher inflation rates mainly in the wake of Russia’s invasion of Ukraine, which drove up energy costs across the bloc. However, those have dissipated in recent months and the biggest price jumps have been in food products instead.

“We have made significant progress but — faced with a more persistent inflation process — we cannot waver, and we cannot declare victory yet,” she added.

The ECB has raised rates since July 2022 amounting to 400 basis points so far. Market players have priced in another rate increase next month and are considering another move for September.

Some economists are also raising questions about when the ECB might have to reverse this tighter policy as they fear that higher rates will slow the economy considerably. However, Lagarde suggested Tuesday that it is too early to make such considerations.

“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.

“It is unlikely that in the near future the central bank will be able to state with full confidence that the peak rates have been reached. This is why our policy needs to be decided meeting by meeting and has to remain data-dependent.”

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