ECB Lagarde plays down the recession risk at Sintra Forum

European Central Bank President Christine Lagarde said the central bank could raise interest rates faster, if necessary.

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On Tuesday, European Central Bank President Christine Lagarde downplayed concerns about a recession in the eurozone, and also said that her team is ready to raise interest rates at a faster pace ̵[ads1]1; if necessary – if inflation continues to shoot higher.

Central bank officials are gathering in Portugal for their annual conference, focusing on rising consumer prices. The eurozone is expected to see an overall inflation rate of 6.8% this year – well above the ECB’s target of 2%.

This comes at a time when economists are considering whether the eurozone will escape a recession this year. The region has seen growth levels deteriorate in the midst of an energy crisis, sanctions against Russia and food insecurity – just to name a few factors.

“We have significantly downgraded our growth forecasts over the next two years. But we still expect positive growth rates due to the domestic buffers against loss of growth momentum,” Lagarde said on Tuesday at Sintra Forum.

The European Central Bank held a crisis meeting earlier this month to announce a new tool aimed at tackling fragmentation risk in the eurozone. However, market participants were left with questions about the timing and scope of the mechanism.

Investors are concerned about high inflation and have been following closely what the ECB is saying and doing. Investors are also wary of the high debt levels in Europe, especially in Italy, and how a return to tighter monetary policy could become an economic constraint for these economies.

“If the inflation outlook does not improve, we will have sufficient information to go faster. However, this commitment is data-dependent,” Lagarde added on Tuesday.

Rising or cutting interest rates?

In an interview with CNBC, Erik Nielsen, global chief economist at UniCredit, said that he does not expect this year’s forum to address differences between public debt levels, but to focus more on the future of monetary policy.

“Can you really raise interest rates into a recession even if inflation is high? That would be unusual,” he said.

In early June, the ECB reaffirmed its intention to raise interest rates next month and then again after the summer. This is likely to bring the ECB’s deposit rate back from negative territory and mark a huge moment for the central bank, which has kept interest rates below zero since 2014.

However, the question is whether Lagarde will follow up with more interest rate increases with the region’s growth prospects becoming darker. The ECB in June forecast a GDP rate of 2.8% for the eurozone this year, but economists are beginning to talk about the prospect of a recession towards the end of the year in light of Russia’s invasion of Ukraine and its impact on the global economy.

According to Nielsen, the Federal Reserve in the United States is in the same position.

“There is a very good chance that the Fed will end up cutting interest rates towards the end of next year or something, and this is the recession story again,” he said.

“They can not implement what they say, they want to do the next one and maybe another trip, but then it will be very difficult for them, both in the US a little later, and in Europe,” he added. .

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