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.
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.”
