Lagarde says goal of ECB rate hikes ‘is not to create a recession’

“We will do what we have to do, which is to continue hiking interest rates in the next several meetings,” she said. 

“Our primary goal is not to create a recession. Our primary objective is price stability and we have to deliver on that. If we were not delivering, it would hurt the economy far more,” she said. 

The ECB has followed the US Federal Reserve in deploying outsized rate hikes to tackle the fastest inflation since the euro was introduced. But the advances in borrowing costs coincide with rising fears of a downturn, stoked this week by Russian threats to further cut energy supplies.

Consumer confidence

Consumer confidence in the eurozone is already at a record low. A gauge of German sentiment plunged further and is at its worst level since the start of the pandemic, figures showed earlier this week. 

While Europe’s economy held up exceptionally well in the first half of 2022, next year will be much more difficult, Slovakia’s central bank chief Peter Kazimir has said. 

In budget forecasts unveiled on Tuesday, Finance Minister Paschal Donohoe has said that growth in the Irish economy will have grown sharply this year, but slow sharply in 2023, but nonetheless avoid contraction.           

Ms Lagarde isn’t alone in prioritisng inflation over growth. Other officials say rates should be raised to the neutral level that neither stimulates nor restricts the economy — thought to be somewhere between 1% and 2% — before they assess whether more action is needed. The ECB’s deposit rate is currently 0.75%.

Speaking in a Reuters interview, Finland’s Olli Rehn said neutral may be reached by Christmas. He echoed several of his colleagues on the 25-member Governing Council in saying October’s meeting presents a choice between hiking by 50 or 75 basis points, the latter currently being fully priced in by money markets. 

Also on Wednesday, Governing Council member Martins Kazaks said the ECB should raise interest rates by another 75 basis points when it next sets policy in October, with steps likely to get smaller after that. 

“In the current situation, we can still make big steps, and the next step still has to be big because we are still far away from rates that are consistent with 2% inflation,” Kazaks said Wednesday in an interview in Vilnius. “I would side with 75 basis points — let’s take a bigger step and move the rates up faster.”

 Bloomberg and Irish Examiner