European Central Bank worries about inflation but holds back ::

– The head of the European Central Bank has said record inflation may persist “longer than expected” and appears to open the door to at least an interest rate hike this year.

Twice questioned by reporters on Thursday, Christine Lagarde declined to repeat previous comments that a rate hike was “very unlikely” this year. She said officials would pay close attention to the numbers and revisit their stance on inflation next month.

At the same time, she said the bank would stick to its timetable for withdrawing economic stimulus measures used to cushion the impact of the COVID-19 pandemic, which would leave only a small margin for an increase this year. Any increase should follow the end of bond purchases, now scheduled for October.

Lagarde spoke after the bank left interest rates and stimulus programs unchanged even as other central banks sought to counter inflation with rate hikes, including the Bank of England. Thursday.

Here are the main takeaways from the meeting:

LAGARDE STICKS TO HIS STORY: Half of the rise in inflation is tied to oil, gas and electricity prices that are largely out of monetary policy’s reach, Lagarde said.

“If the ECB were to first reduce and complete its asset purchases and then quickly raise interest rates, do you think that would have an impact on energy prices? No,” she said.

ANALYST TAKE: Lagarde’s remarks mean a rate hike this year is no longer out of the question, if not the wait, says Holger Schmieding, chief economist at Berenberg Bank. He moved his prediction for the first rate hike from June 2023 to March 2023. Lagarde abandoning his previous position that a rate hike in 2022 is “very unlikely,” a faster end to bond purchases and a rise in rates this year “are now at least an option,” he said.

RECORD PRICE INCREASES ARE TOP OF THE AGENDA: Lagarde said there was “a general concern around the table about inflation and its impact on our fellow Europeans”, people who “need to do refuel and put food on the table”. Annual inflation in the euro zone stood at 5.1% on Wednesday, the highest since 1997 and well above the bank’s 2% target, considered the best for the economy. costs.

INFLATION IS PERMANENT BUT SHOULD DECREASE: The main factors behind high inflation, such as supply bottlenecks and high oil and gas prices, are expected to ease. As Lagarde put it: “Inflation is expected to remain high for longer than expected, but decline over the course of this year.” The bank sees inflation dropping to 1.8% in 2023, and this is critical as it indicates that inflation will fall below the bank’s target.

NEXT MEETING COULD BE INTERESTING: The inflation outlook could change on March 10, however, when the bank receives new projections from staff.

LAGARDE DISCOURAGES COMPARISONS WITH THE UNITED STATES AND BRITAIN: Lagarde said the European Central Bank, the US Federal Reserve and the Bank of England were “operating in different environments”, with the US economic recovery from the pandemic being more advanced and demand fueled by higher stimulus spending. She said economic support from Europe had been weaker and wage increases more moderate. The Fed has signaled that it could begin a series of rate hikes as early as March to counter inflation, which is at 7%, its highest level in 40 years.

STAYING WITH ITS ROADMAP FOR THE MOMENT: The board has not touched on plans to phase out the pandemic stimulus. A €1.8 trillion bond-buying program will end in March. Some of his purchases will be moved to another program that will continue until October, and longer if necessary to keep borrowing costs in the market. Once the bond purchases are complete, the bank could start raising rates.

THE BANK WILL NOT BE IN A HURRY: Lagarde says the roadmap hasn’t changed and the bank remains ‘true to our streak’, warning not to ‘take on too much’ in terms of immediate rate hikes after the end of bond purchases.

“We won’t be complacent but we won’t be rushed into a process, we will go through the sequence that we have set ourselves,” she said.

Rates are at historic lows: one key benchmark is at zero and another at minus 0.5%.

Mary I. Bruner