The ECB is dealing with both record-high inflation and a slowing economy, with many economists predicting a recession in the region before the end of the year.
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ECB President Christine Lagarde said on Friday that the European Central Bank will continue to raise interest rates and may even need to limit economic activity to contain inflation.
The ECB raised interest rates by an unprecedented 200 basis points since July to tackle inflation and said it would tighten policy through rate hikes and debt relief of 5 trillion euros (5.2 trillion euros). billion USD) is holding.
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“We expect further rate hikes – and the withdrawal of support may not be enough,” Ms. Lagarde told a conference.
“Interest rates are and will remain the main tool to adjust our policy stance,” she said. “Acknowledging that interest rates remain the most effective tool for shaping our policy stance, it is appropriate that the balance sheet be normalized in a measurable and predictable manner.”
At 1.5%, the ECB’s deposit rate is not far from the so-called neutral rate, where the bank neither stimulates nor stifles growth. Most estimates for the neutral rate are between 1.5% and 2%, suggesting that after the expected rate hike in December, the “accommodation” will be eliminated.
The problem is that inflation, which currently stands at 10.6%, is well above the ECB’s 2% target and even a recession, now almost certain in the winter months, is unlikely. could alleviate price pressures enough to bring the ECB to a halt.
Investors are currently split between valuations that are up 50 and 75 basis points in December after consistently rising 75 basis points and seeing a reduction in bond holdings, also known as tightening. quantitative tightening, starting from the first half of 2023.
The ECB will outline plans to reduce its balance sheet in December, and the process is expected to begin with the bank allowing some, but not all, of its bonds to expire.
“The ECB will ensure that a period of high inflation does not affect inflation expectations, allowing excessive inflation to become inherent,” Lagarde said.
