Policy rates must be higher to curb inflation: ECB chief

European Central Bank (ECB) President Christine Lagarde indicated borrowing costs will increase again, saying this is required to temper soaring consumer-price growth.
“At the moment, ECB policy rates must be higher to curb inflation and bring it down to our target of 2%,” Lagarde told Croatian newspaper Jutarnji list. “That process is essential because it would be even worse if we allowed inflation to become entrenched in the economy.”
The ECB raised interest rates by 250 basis-points this year and policymakers including Lagarde have said more hikes are to come, with markets and economists expecting half-point steps at the next two meetings.
While such rate aggression comes just as an economic downturn takes hold in the region, the ECB president highlighted that the “recession we feared is likely to be short-lived and shallow,” citing her institution’s most recent forecasts.
She also highlighted the ECB’s ever-watchful eye on inflation.
“We must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect,” Lagarde said.
“We know wages are increasing, probably at a faster pace than expected, but we must be wary that they do not start fuelling inflation.”
Meanwhile European Central Bank President Christine Lagarde said the currency union’s newest member proves that the euro has lasting appeal.
“Croatia worked hard to become the 20th member of the euro area, and it succeeded,” Lagarde said in a statement yesterday. “It shows the euro is an attractive currency, which brings stability to its members.”
The Adriatic country of 3.9mn, scarred by war a generation ago, just completed its transformation and became the latest country to join the world’s biggest currency zone. It also means the ECB Governing Council increases to 26 policymakers, with Croatian National Bank Governor Boris Vujcic joining the ranks of rate setters.
Croatia became the first European Union member to join both the Schengen area and the eurozone on the same day.
“Being able to cross internal borders without controls is one important achievement, being able to pay cross-borders using the same EU currency is another,” European Commission President Ursula von der Leyen said yesterday in a news conference at a Croatian border crossing.
Two other euro hopefuls aren’t so fortunate. Romania’s bid for membership has been hampered by internal squabbling, evidenced by the highest turnover of governments in the EU.
Bulgaria, the bloc’s poorest country, wants to join in 2024, but wary European officials aren’t convinced that its economy and scandal-plagued banking system are ready for currency prime time. Ultimately adopting the euro is actually a condition of signing up to the EU, though the Czech Republic, Hungary, Poland and Sweden don’t seem interested. Denmark, which clinched an opt-out on acceding before the dawn of the currency, isn’t budging either.
“Only six EU member states are not members of the club,” excluding Denmark, Lagarde said separately in an interview with Croatian newspaper Jutarnji list published on Saturday. “If they need more time, that is fine. When they meet the criteria and wish to join, we will be happy to increase the number of euro-area countries.”