ECB rates to stay restrictive as long as needed, Lagarde says

European Central Bank president Christine Lagarde reiterated that borrowing costs will remain elevated for as long as needed to tame consumer prices – even as the bloc’s economy struggles.

“Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,” Ms Lagarde told legislators in the European Parliament.

“We remain determined to ensure that inflation returns to our 2 per cent medium-term target in a timely manner,” she said on Monday in Brussels, sticking closely to this month’s ECB policy statement that accompanied a 10th straight hike in rates to 4 per cent.

That’s a level most economists and investors reckon will be the peak in a more than year-long campaign to stamp out inflation. Some ECB governing council members have endorsed that assessment, with Spain’s Pablo Hernandez de Cos saying on Monday that the current level should bring price growth back to the 2 per cent goal if maintained for long enough.

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Bank of France governor François Villeroy de Galhau said the ECB shouldn’t test the economy “until it breaks” – a hint that he prefers not raising rates any further.

Ms Lagarde acknowledged the pain the ECB’s actions are causing, particularly for the 30 per cent of households who have variable-rate mortgages.

“Our duty is to return inflation back to target in a timely manner,” she said. “The faster it gets there, the more stable prices are, the less painful it will be going forward for both those who invest but also those who have borrowed.”

Some officials, though, are less certain that the high point in rates has been reached yet. Bundesbank president Joachim Nagel said last week that it was too soon to make such declarations as inflation remained too elevated and was forecast to decline only slowly.

A key challenge is judging how the economy responds to the 450 basis points of monetary tightening enacted since July 2022. The euro-zone outlook has worsened lately, with Germany a particular weak spot. Business confidence there improved only marginally in September while remaining at historically low levels, data released Monday by the Ifo institute showed.

“Activity in the euro-area economy is clearly moderating,” ECB executive board member Isabel Schnabel said in a separate speech on Monday. – Bloomberg