With the U.S. Federal Reserve increasingly likely to raise rates this year, European Central Bank President Christine Lagarde said the eurozone no longer needs to pursue the kind of aggressive tightening it undertook in the past. The remark is interpreted to mean that the ECB will adjust monetary policy gradually in line with economic conditions, unlike the tightening phase of 2022-2023 carried out to counter inflation that surged amid the Russia-driven energy crisis.
According to the Financial Times on Sunday, Lagarde said in her opening speech at the ECB's annual forum in Sintra, Portugal, "We don't need to respond with the same intensity as in 2022-2023," adding, "We can now adjust rates carefully in line with the shocks we are facing."
After double-digit inflation emerged following Russia's halt of gas supplies, the ECB raised its deposit rate, the policy rate, from -0.5% to 4.0% between July 2022 and September 2023. Although energy prices have risen again recently due to the war in Iran, pushing up inflationary pressure, his assessment is that this is not a crisis phase comparable to that period.
After consumer price inflation reached 3.2% last month, the ECB raised its deposit rate this month by 0.25 percentage point, from 2.00% to 2.25%. It marked the first case of a Group of Seven (G7) central bank raising its benchmark rate since the war in Iran.
Lagarde drew a line, saying the move was not an "insurance rate hike" in preparation for possible future price increases. "Without this increase, inflation would have remained above the ECB's 2% target even in 2027 and 2028," she said. "In all the scenarios we examined, this decision was justified."
She also assessed that the ECB has returned to a normal monetary policy regime, moving away from the unconventional monetary policy it had used for more than a decade since the global financial crisis and using interest rates again as its core policy tool.
However, she was reticent about the future direction of monetary policy. "We no longer need complex forms of forward guidance," Lagarde said. "The ECB's decisions will be made meeting by meeting based on economic indicators." The market sees a high likelihood that the ECB will raise its benchmark rate by another 0.25 percentage point by October.
"Since the Middle East war, our economic forecasting errors have been very small," Lagarde said. "The eurozone withstood the largest U.S. tariff increases in nearly a century and crude oil supply disruptions that the International Energy Agency (IEA) assessed as the largest in history." She stressed, "The costs along the way were not small, but they did not lead to a shock severe enough to shake the economy."
