FRANKFURT, Germany (AP) — European Central Bank President Christine Lagarde warned on Friday that the bank may have to raise interest rates beyond simply withdrawing stimulus and into territory that could dampen growth. as the bank struggles to control record inflation in the 19 countries that use the euro.
“We plan to raise rates further, and pulling back the adjustment measures might not be enough,” Lagarde said in a speech at a banking forum in Frankfurt, Germany. She said the bank intended to bring inflation down “in a timely manner” and that “how far we need to go, and how fast, will be determined by the outlook for inflation.
The ECB raised rates at the fastest pace in its history to tackle inflation which hit 10.7% in the euro zone in October, the highest since records began in 1997 and well above the bank’s 2% target.
Inflation has been fueled by high natural gas prices caused by gas supply cuts from Russia during the war in Ukraine and by bottlenecks in the supply of parts and raw materials as demand rebounds following restrictions imposed during the coronavirus pandemic.
In response, the central bank has raised its benchmarks by two percentage points since July. Analysts expect further increases to come from a Dec. 15 meeting.
Lagarde warned governments against overspending to support consumers and businesses hit by high energy costs, saying such financial relief should be temporary and targeted to those who need it most. Otherwise, spending could drive up demand and hence inflation, and weaken incentives to save energy.
Higher benchmark interest rates from the central bank influence the cost of lending, raising the price of credit and making it more expensive to borrow, spend or invest, thereby reducing the demand for goods and, in theory, limiting prices.
While higher rates are a key tool to contain inflation, their use can raise concerns about the impact on growth. Bank officials say higher rates now will obviate the need for even more drastic measures later if inflation continues to spin out of control.
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