Inflation has been far more stubborn than central bank officials—or the general public—would have liked, not just in the U.S., but worldwide. The latest example of that fact came last week, when Eurozone inflation surprised economists, sinking less than forecast despite falling energy prices.
Christine Lagarde, president of the European Central Bank (ECB), said over the weekend that the latest data means the ECB will have to keep raising interest rates to ensure price stability, adding that a 50 basis point rate hike in March is “very likely.”
“We will do whatever is needed to return inflation to 2%,” she told the Spanish newspaper El Correo in a Sunday interview, referencing the central bank’s inflation target. “I see our action as being more sustained because inflation is a monster that we need to knock on the head and keep at 2%.”
Year-over-year inflation in the Eurozone fell from its October peak of 10.6% to 8.5% in February, Eurostat reported last week. But economists had forecasted a more significant drop to 8.2%, and core inflation—which excludes volatile food and energy prices and is closely followed by central bankers—went in the other direction, jumping to 5.6% in February from 5.3% in January.
“Inflation has not been transitory, but disinflation could be,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, told Fortune last week, adding that the latest Eurozone inflation data has “confirmed” further rate hikes from the ECB.
After eight years of negative interest rates, the ECB has raised its key deposit rate from negative 0.5% to 2.5% since last summer in order to fight the rise of inflation. And economists expect the central bank will continue to increase interest rates until they hit 4%, topping 2001’s peak of 3.75%.
Lagarde wouldn’t say how high rates in Europe will ultimately go on Sunday, but she did say that the central bank had “more work to do,” arguing core inflation will be “stickier in the near term.” Amid fears about the potential for the ECB’s rate hikes to spark a recession, Largarde also promised to be “data dependent” and understanding of the economic costs of rising rates.
“We don’t want to break the economy; that’s not our goal,” she said. “Our goal is to tame inflation. And as a central bank, interest rate hikes are our main tool to achieve that. Raising interest rates dampens demand and reduces inflationary pressures.”
Lagarde added that for now, the economy remains “resilient” and the labor market is strong, which gives her faith that more rate hikes are appropriate. The unemployment rate in the Euro Zone remained at 6.7% in January, just a hair off the record low of 6.6% seen in October.
After repeated recession predictions last year, most economists believe the bloc will avoid a recession this year due to the strong labor market as well as lower than expected energy prices caused by an unseasonably warm winter. And “Russian oil supply is still holding up,” according to Goldman Sachs, even amid Western sanctions on exports, meaning energy prices should remain low.
Largarde said Sunday that the strong employment data and low energy prices have given her a more positive outlook for the European economy moving forward, and she doesn’t expect a recession in 2023
“We anticipate positive growth and increased activity over the course of the year,” she said, refraining from offering specific inflation or GDP numbers.
Despite the better than expected aspects of the European economy, Largarde noted that persistent inflation means temporary support from governments may still be needed to help “vulnerable people” cope with the rising cost of living. And she said that the future of the European economy remains up in the air due to the war in Ukraine.
“There is huge uncertainty. A little more than a year ago, we could never have imagined that there would be a war right on Europe’s doorstep. What will happen over the coming months is uncertain,” she said.
