The ECB will take all measures to fight high inflation and financial crisis European Central Bank President Christine Lagarde said ECB leaders are not find no conflict between their inflation targeting mission and their responsibilities to prevent threats to the financial system.
“Price stability comes with financial stability, and both of these factors should be present in the aggregate, but without the search for compromise solutions, ”she explained legislators in Brussels. “Financial stability, insofar as it affects economic situation, and to the extent that it informs our forecasts, determines that perception, how we assess the situation from a macroeconomic point of view, but these are two different stability provided by different tools”.
These comments develop a theme that Lagarde had already touched upon earlier after the ECB raised the key interest rate by half a point and did not outline its next steps.
In the opening part of her speech to the European Parliament, the President strictly adhered to language used a week earlier that officials were “ready to respond as necessary to maintain price and financial stability, and then she also reiterated her assessment that “fast Actions and Decisions” of Switzerland in relation to Credit Suisse Group AG.
“We use the interest rates that are reasonable, and this has been the case for the last times, it has been like this before, because we have enough opportunities to move at the pace in which we move,” she said. “In terms of financial stability, we have all necessary tools”, and “these tools will be used in case necessary,” she added.
Some bankers argue that monetary tightening is likely to be needed continue when the tension subsides. Head of the Latvian Central Bank Martins Kazaks said in an interview with Bloomberg news agency that the cost of borrowing should grow even more “if the base case holds and market volatility decreases and won’t break the script.
An excellent opinion was expressed by his Greek colleague Yiannis Sturnaras, warning on CNBC Europe that the ECB is now “near the end of the tightening cycle” and that “interest rate hikes rates are largely a thing of the past.” Lagarde’s remarks did not spark debate, although she acknowledged that a banking crisis could eventually force officials to change their minds.
“Financial stability tensions could have an impact on demand and actually do some of the work that would otherwise be done by the monetary politics,” she said. “At the moment, this influence is uncertain, but it is necessary will take into account when we start making our next forecasts, as well as when we will form our next estimates and decide on the next step monetary policy”.
In the ECB’s latest economic forecasts, which were released before the the bankruptcy of Silicon Valley Bank caused turmoil in the financial system and UBS Group AG agreed to take over struggling competitor Credit Suisse, it was predicted that by 2025 inflation will approach the target level of the Central Bank in 2%, but still remain above it.
Justifying the hike in the key interest rate, Lagarde acknowledged how much tensions in the financial system influenced the latter decision. “Given the distance we need to overcome and the inflation we face, this 50 basis point hike was the smart decision that needed to be made accept,” she said.
“We would note that subsequent increases will be required, but before in the face of the uncertainty that we had, this did not happen, because in this situation it would be incorrect to make unambiguous judgments.” Speaking later as Chair of the European Systemic Risk Board, Lagarde stressed that the region’s banking sector remains strong and capital stocks are “much higher than fifteen years ago, before the global financial crisis.”
However, “without exception, financial institutions should carefully maintain their current level of resilience to ensure they can withstand potentially less favorable conditions,” Lagarde said.