FRANKFURT: European Central Bank president Christine Lagarde said Thursday that a “mild” eurozone recession was looming but would not be enough to bring down record-high inflation.
Inflation in the 19-nation currency club surged to 10.7 percent in October, more than five times the ECB’s two-percent target, as Russia’s war in Ukraine drives energy prices higher.
Speaking at a banking conference in Riga, Lagarde said “a mild recession” was possible in late 2022 and in early 2023, as soaring consumer prices and the continent’s energy crisis dampen economic activity.
“But we do not believe that that recession will be sufficient to tame inflation,” she warned, indicating that more interest rate hikes were coming.
The ECB last week unveiled another jumbo interest rate hike of 75 basis points, the second such move since September and the third rate increase since July, after a decade of historically low borrowing costs for the euro region.
Lagarde has warned that higher borrowing costs could deepen the pain of an economic downturn, but the ECB – like other central banks – is for now prioritising the fight against inflation.
In the United States, the Federal Reserve on Wednesday lifted its rates to their highest level in 15 years and signalled that further increases would follow.
“We have to be mindful of each other and we have to be attentive to potential spillovers and spill backs, as I think the Fed is also mindful of,” Lagarde said.
ECB board member Fabio Panetta cautioned that the Frankfurt institution had to pay “close attention” to the impact of more expensive borrowing costs on households and consumers as the economic outlook darkens globally.
“A bigger-than-expected rate increase may heighten volatility and have a stronger impact in the current highly leveraged environment after a decade of very low rates and ample liquidity,” he said at a finance conference in Frankfurt.
“When calibrating our stance, we need to pay close attention to ensuring that we do not amplify the risk of a protracted recession or trigger market dislocation,” Panetta added.