Lagarde sees more risk of recession and rules out that it will moderate prices a lot


The president of the European Central Bank (ECB), Christine Lagarde, has warned this Friday that the threat of a recession in the euro zone is more intense and has made it clear that it is “unlikely” that that decline in the economy in the region going to reduce inflation a lot in the short term. The entity intends to continue with the interest rate hikes -which currently stand at 2%- to try to stop a rise in prices that reached historic levels in October, at 10.6%.

Lagarde has made these considerations within the framework of the XXXII European Banking Congress at the Alte Oper in Frankfurt. In his speech, he stressed that the inflation outlook will determine how far and how quickly the issuer raises interest rates, which are the main tool the entity has to adjust its monetary policy. However, they are not the only one, and with a view to the meeting of the Governing Council in December, the entity decide how to modulate its debt purchase programs to reduce bond holdings.

“Although the latest data on GDP growth have surprised to the upside, the risk of recession has increased,” Lagarde remarked, who also wanted to make clear the ECB’s vital commitment to its mandate to ensure that inflation expectations remain anchored while inflation remains high. “We are committed to reducing inflation to our medium-term goal and we will take the necessary steps to do so“, has settled.

In this context, the President of the ECB has reminded governments that their fiscal policy “must be temporary, focused and adapted”. Temporary, so that it does not put too much pressure on demand in the medium term; targeted, so that the size of the fiscal impulse is limited and benefits those who need it most; and adapted so that it does not weaken the incentives to reduce energy demand.

The foregoing implies, according to Lagarde, that when the time comes for national governments to consolidate their fiscal policies, it will make a difference if they do so by reducing transfers and public consumption and increasing taxes or cutting public investment. If they opt for the latter method, as they did after the great financial crisis, “there is the risk that the offer will not recover and growth restrictions remain binding,” warns the ECB president.


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