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The "stagflation" is not the benchmark for the ECB, assures Christine Lagarde

The President of the European Central Bank (ECB), Christine Lagarde, estimated this Saturday, May 7 that high inflation combined with lasting stagnation is not the “benchmark” for which the institute leans, fueling the debate in view of an upcoming first rate hike. “Although the unusual degree of uncertainty could mean a combined slowdown in growth and high inflation, the current situation cannot be compared to that of the 1970s”, says Christine Lagarde in an interview given to the Slovenian daily Delo.

Such a scenario known in the past and designated by “stagflation” is “not currently our reference”, argued the former French Minister of the Economy. The oil shock in the early 1970s had caused the economy to collapse – by eight percentage points – and inflation was higher than it is today. In addition, a spiral of wage increases in response to inflation had begun, fueling it, which “we don’t see (…) today”, she added.

The delicate timing of the first rate hike

His message temporarily punctuates a sequence provided with communication in the circles of central bankers in the euro zone, where everyone has given during the past week his idea of ​​the right time to decide on a first rate hike. This will be a major step in the ongoing process of normalization of the accommodative monetary policy conducted in response to crises, in particular that linked to covid-19 from 2020.

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The institute has already made a gradual withdrawal of its massive debt buybacks launched in 2015 to counter the excessively low inflation. These redemptions should be reduced to zero (in net) “at the beginning of the third quarter”, according to Ms. Lagarde, and the adjustments of the key rates “will take place some time later and will be gradual.”

This leaves the possibility of debating a first rate hike – since 2011 – during the last monetary policy before the summer break, set for July 21, as suggested by several members of the ECB such as Isabel Schnabel, member of the executive board. . The guardians of the euro should mainly decide according to the evolution of the war in Ukraine. This war “is above all a human tragedy” which also has “economic consequences beyond Ukraine”: it “weighs on growth and fuels inflation”, insisted Ms. Lagarde.

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