Lagarde warns of future ECB rate hikes despite deteriorating growth outlook

European Central Bank (ECB) chief Christine Lagarde has warned that Frankfurt will continue to raise interest rates even with economic activity expected to “slow substantially”.

“We expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations,” she told the European Parliament’s committee on economic and monetary affairs.

“Our destination is clear — an interest rate that will deliver 2 per cent price growth,” she said, noting this was the ECB’s primary mandate.

With inflation across the bloc running at a record 9.1 per cent, markets are pricing in another three-quarter point rate hike in October, translating into more expensive mortgages, loans and credit card debt for consumers. The increase will depend in large part on this month’s inflation reading, which is due on Friday.

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Ms Lagarde warned that government interventions to date had been too broad and untargeted and had the potential to undermine the ECB’s efforts to rein in price growth.

“There are more measures that are across the board than measures that are specifically tailored to the most in need,” she said. The approach is “not necessarily conducive to a well co-ordinated fiscal and monetary policy”.

Ms Lagarde said ECB officials wanted to reach the so-called neutral rate of interest, which neither stimulates nor restricts the economy. At that juncture, they would decide whether further monetary tightening was required.

She said policymakers and officials would continue to monitor longer-term inflation expectations, which currently stand at about the ECB’s goal, she said.

Economists worry that tight labour markets combined with inflation expectations may bid up wages and embed price growth in the euro-zone economy.

“Wage dynamics remain contained so far,” Ms Lagarde said. “However, resilient labour markets and some catch-up to compensate for higher inflation are likely to push up wage growth.”