ECB to watch bank rates for signs of stress, Lagarde says

ECB President Christine Lagarde stated on Wednesday that the central bank’s recent interest rate hikes are just beginning to show an effect on the economy, but could have a greater impact due to potential banking turmoil. Investors are uncertain about the ECB’s ability to continue raising rates to combat high inflation, particularly in light of recent turmoil in the banking sector, including the collapse of two US lenders and the need for a last-minute rescue of Swiss giant Credit Suisse.

Lagarde suggested that the ECB’s moves to increase borrowing costs could have a magnified impact if banks become more hesitant to take risks and start asking for higher rates when lending. This would likely require the central bank to increase its own interest rates by a lesser amount.

Lagarde reaffirmed the ECB’s commitment to bringing eurozone inflation down to 2% from 8.5%, which was last month’s figure. She noted that previous rate increases were just beginning to affect the economy.

“For inflationary pressures to ease, it is important that our monetary policy works robustly in the restrictive direction,” she said. “And that process is only starting to take effect now.”

The ECB has boosted the deposit rate it pays to banks by a staggering 350 basis points to 3% since July, and financial markets anticipate that it will rise to 3.5% later this year.

Although the central bank for the 20 countries that share the euro zone raised rates last week, it removed a message from its policy statement that indicated it would raise rates during upcoming meetings in light of recent financial jitters.

Eurozone inflation has already begun to decline after peaking at 10.6% in October, however, prices that exclude energy are still growing steadily.

ECB Chief Economist Philip Lane, speaking at the same event following Lagarde, claimed that he expects core prices to also ease over time, as lower fuel costs spread to other sectors. However, he warned that this expectation is predicated on wage growth peaking this year.

(Reporting By Francesco Canepa and Balazs Koranyi; Editing by Toby Chopra and Christina Fincher)

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