European Central Bank unlikely to hike rates

FRANKFURT, GERMANY — The head of the European Central Bank warned that high oil and gas prices are hitting consumers in the 19 countries that use the euro harder than in other major economies and said the bank won’t add to the squeeze by raising interest rates anytime soon.

Christine Lagarde’s message that it’s “highly unlikely” the bank will increase borrowing rates from record lows next year comes as other central banks around the world, including the U.S. Federal Reserve, are beginning to withdraw extraordinary stimulus measures that propped up their economies during the pandemic.

The European Central Bank sees higher consumer prices as stemming from transitory factors that “are likely to fade” in coming months, Lagarde said in the text of a speech delivered Friday at the Frankfurt European Banking Congress. Those include high oil and gas prices and shortages of raw materials and parts as businesses struggle to meet stronger demand for goods.

“We must not rush into a premature tightening when faced with passing or supply-driven inflation shocks,” Lagarde said.

Central banks typically raise interest rates to cool off larger-than-desired price increases, leading to higher mortgage payments and more expensive loans. But the bank sees inflation falling to 1.5% by 2023, below its target of 2%.

Lagarde said raising rates or cutting other stimulus now would only increase the squeeze on household incomes. “At the same time, it would not address the root causes of inflation, because energy prices are set globally, and supply bottlenecks cannot be remedied by the ECB’S monetary policy,” she said.

Annual inflation hit 4.1% in October, the highest since 2008, with 2.2 percentage points of that from energy prices.