ECB needs to keep interest rates ‘high’ to combat inflation: Lagarde
ECB would pursue that goal even though eurozone was in a “critical” moment with inflation going down, monetary tightening beginning to have an impact, and banks limiting credit, says Lagarde
The European Central Bank needs to keep interest rates high to curb inflation in the medium term, its president Christine Lagarde said, signalling more monetary tightening.
The ECB slowed the pace of rate hikes this month with a 25-basis-point rise, but Lagarde indicated the cycle was not over.
“We still have to have sustainably high interest rates, so it’s a time when we have to really buckle up and look at this target that we have and deliver on it,” Lagarde told Spanish state television TVE.
The European Central Bank has a medium term inflation target of 2 per cent.
Lagarde, who did not elaborate on potential further hikes, said: “Our goal is simple and straighforward: price stability. And we have to be totally determined to deliver that.”
Markets expect a fresh, 25-basis-point increase at the ECB’S June meeting and possibly one more by the end of the summer, followed by rate cuts starting early next year.
“We are heading towards more delicate decisions going forward but we will be courageous and we will take the decisions that are needed to bring inflation back to 2 per cent. And we will do it, no question about it,” Lagarde said.
She said the ECB would pursue that goal even though the eurozone was in a “critical” moment with inflation going down, monetary tightening beginning to have an impact, and banks limiting credit.
Underlying price growth, the key focus of ECB policymakers in recent months, slowed a touch in April to 7.3% from 7.5%, though the crucial services component continued to accelerate.
Meanwhile the European Central Bank is considering whether requirements tailored for individual lenders could help address the risks arising for those holding large amounts of uninsured deposits, a document showed.
A paper ECB supervisors prepared for this week’s meeting of eurozone finance ministers said recent banking turmoil showed “increased atention needs to be paid to the liquidity and funding risk outlook of the sector as monetary policy shits to a new regime.”
The ECB said it was actively working with other global supervisors to understand which lessons could be learnt.
Deposit flights have caused the failure of some US regional banks and forced Switzerland to orchestrate Credit Suisse’s rescue by rival UBS.
“It may be beneficial to explore how factors such as high deposit base concentration and a predominant reliance on uninsured deposits could be dealt with in the Pillar 2 framework,” the ECB said.
Most European Union countries have some form of national insurance that guarantees deposits up to 100,000 euros ($110,080).
The Pillar 2 framework is a supervisory process aimed at ensuring each lender has adequate capital and liquid asset holdings based on its specific risk profile.
The ECB can impose additional capital and liquidity requirements if it sees fit. It would use liquidity requirements to address liquidity risks.
The Pillar 2 liquidity framework focuses on liquidity risks that are not fully addressed by Pillar 1 requirements: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).
The LCR forces banks to hold high-quality assets (HQLA) they can convert into cash, either through a sale or by pledging them as collateral, to cover cash ouflows over a 30-day period.
Banks mostly hold government bonds as HQLA, but rising interest rates have curtailed the value of these holdings, so for example Silicon Valley Bank suffered a major capital hit when it sold US Treasuries to offset deposit flights.
“Areas of focus include some elements of the calibration of the LCR and the extent to which assets held at amortised cost, which may be difficult to sell without suffering losses when liquidity needs arise, can qualify as HQLA,” the paper said.
The European Central Bank will not flinch from taking the decisions needed to bring inflation down to its mid-term goal of 2 per cent, the bank’s president Christine Lagarde said on Friday, hinting at further monetary policy tightening.
The ECB slowed the pace of its interest rate increases earlier this month with a 25-basis-point hike but signalled more tightening was coming.
“We are heading towards more delicate decisions going forward but we will be courageous and we will take the decisions that are needed to bring inflation back to 2 per cent,” Lagarde told Spanish state television TVE as part of an interview expected to be aired in full later.
Eurozone inflation accelerated last month to 7.0 per cent from 6.9 per cent in March, confirming preliminary data pointing to increasingly stubborn price growth among the 20 nations sharing the euro.
The European Central Bank will be courageous and will make the decisions needed to bring inflation down to its mid-term goal of 2 per cent, ECB president Christine Lagarde said.