ECB can’t just mirror Fed moves, Lagarde says

FRANKFURT: The European Central Bank must be attentive to policy decisions by the US Federal Reserve, which influence global markets, but cannot just mirror its moves, ECB President Christine Lagarde said on Thursday after the Fed guided for more rate hikes.

The Fed raised its main interest rate by another 75 basis points on Wednesday and chair Jerome Powell said the battle against inflation would require borrowing costs to rise “higher than previously expected”, leading investors to price in more ECB hikes too.

But Lagarde said the ECB, which itself raised rates by 75 basis points last week, could not simply mimic the Fed because economic conditions were different in the 19-country euro zone - a point underscored earlier by ECB board member Fabio Panetta.

“We have to be attentive to potential spillovers,” Lagarde told a conference in Riga. “We are not alike and we cannot progress either at the same pace (or) under the same diagnosis of our economies.”

Lagarde conceded the ECB was “influenced by the consequences” of Fed action through financial markets and especially the euro’s exchange rate, which was falling against the US dollar on Thursday.

“Clearly the exchange rate matters and has to be taken into account in our inflation projections,” Lagarde said. In his own speech, Panetta said the euro zone was more vulnerable than the United States to a global economic slowdown and higher energy prices, and that Fed’s own tightening was already taking its toll, meaning the ECB needed to be cautious.

Specifically, he argued that the ECB should avoid raising interest rates too fast because that could excessively hurt economic growth, home prices and the financial markets.

“If these bigger-than-expected increases are interpreted as signalling a higher terminal rate, rather than simply frontloading the normalisation, we could have a stronger impact on financing conditions – and ultimately on economic activity – than intended,” Panetta told an ECB event.

ECB’s next rate move likely between 50 and 75 bps

He was echoed by Portuguese central bank governor Mario Centeno, who said in an interview the ECB had already completed a large part of the rate hikes it sees as needed.

But other members of the ECB’s policy-making Governing Council continue to take a more aggressive view.

Speaking alongside Lagarde, Latvian central bank governor Martins Kazaks said rates needed to rise “much higher” and there was no need to pause the hikes at the turn of the year.