Lagarde points out that the rise in interest rates is beginning to affect the economy

Almost a year after the European Central Bank (ECB) began to raise interest rates, the economy begins to notice it, that is, it slows down. “The full effects of our monetary policy measures are beginning to materialize,” ECB President Christine Lagarde solemnized in the European Parliament. “Recent ECB staff analysis indicates that the effects of monetary policy tightening on real activity and inflation can be expected to strengthen in the coming years,” she added. That is to say, the castor oil from the rise in rates is beginning to be noticed by prices. Even so, as Lagarde herself has warned, these words “are surrounded by considerable uncertainty.”

The highest monetary authority in the euro zone explained to the MEPs that “the rise in interest rates is being strongly transmitted to the financial conditions of companies and households, as can be seen in the increase in interest rates on loans and the fall in the volume of credit. This is what would lead him to conclude that her measures are having an impact on economic activity.

But these conclusions do not have to mean that rate hikes come to an end immediately. “There is no clear evidence that underlying inflation has peaked,” explained the president of the banking regulator, despite the fact that, at least in the euro zone, the latest data show that price indices, when discounted more volatile items (energy and fresh food) have been down for two months.

“Our future decisions will guarantee that official interest rates are placed at sufficiently restrictive levels to achieve a timely return of inflation to our medium-term objective of 2% and remain at these levels for as long as necessary,” he launched. Lagarde after warning that “price pressures continue to be strong”. Those forces that push upwards no longer come from energy directly, but the consequences on other products of the initial increase in the price of this “and of the bottlenecks in supply”, something that the ECB trusts will disappear “gradually”.

From Lagarde’s speech in the Commission for Economic and Monetary Affairs of the European Parliament, it can be concluded that the recession has been avoided, among other causes, due to the drop in energy prices observed since the beginning of last autumn. The substantial rise in fuel prices, mainly gas, was the main cause of inflation in 2022 and, consequently, the one that pushed the ECB to raise rates. On the other hand, the collapse in the price of those same raw materials has helped to amortize the response of monetary policy to that same inflation. Lagarde has explained it this way: “Growth in the euro zone came close to stagnating at the beginning of 2023. Activity is being supported by the drop in energy prices, the relief of supply bottlenecks and the support of fiscal policy to companies and households”.

Withdrawal of aid

Lagarde has once again asked governments for collaboration in her fiscal policy so that she can stop the ECB’s monetary restrictions as much as possible: “As the energy crisis fades, governments should withdraw the support measures related to it promptly and concerted manner to avoid increasing inflationary pressures over the medium term, which would require a stronger monetary policy response. For this reason, the French woman has applauded the recommendation of the European Commission that countries withdraw their extraordinary aid this year.

In her words at the Eurochamber, the also former managing director of the IMF has pointed out something that has attracted attention during this price crisis: “In some sectors, companies have been able to increase their profit margins thanks to the mismatches between supply and demand.” demand and the uncertainty created by high and volatile inflation”. Both the ECB and the European Commission have stressed that in recent months there have been companies that have maintained or increased margins and have not acted as buffers against price rises, that, the technicians of the Community Executive have come to point out, would give room for increase wages.

This latest movement, Lagarde pointed out, would be taking place now because “salary pressures have been further reinforced as wage earners recover part of the purchasing power they have lost as a result of high inflation.”

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