Interest rates remain the primary tool for steering the economy. The European Central Bank (ECB) will continue to raise rates as needed to combat inflation and maintain price stability. In a regular monetary dialogue with the European Parliament’s Economic Affairs Committee, ECB President Christine Lagarde stated that price increases have not yet reached a ceiling. She underscored that inflation is not finished and that further rate increases will occur if necessary to restore inflation toward the 2 percent medium term target. Decisions by the Governing Council will depend on incoming data, with the next meeting shaping the path forward.
Higher interest rates reduce demand pressures by making borrowing more expensive and influencing how households and businesses spend, save, borrow, and invest. Lagarde noted that this policy action should exert downward pressure on prices, even though the effects will take time to be felt in the economy and may entail some risks of side effects.
The ECB chief cautioned against predicting the exact timing of inflation’s peak. She highlighted substantial uncertainty and acknowledged that inflation could decline over the long run as bottlenecks ease and monetary policy progressively normalizes, but she did not see a clear sign that inflation has peaked. Economists noted upside risks that keep the inflation outlook uncertain.
The conclusion remains that rate rises will continue at levels necessary to ensure inflation returns to the 2 percent target in the medium term. Given wide uncertainty and ongoing financial-market volatility, policy decisions will be data driven and taken at upcoming meetings. The pace and extent of tightening will depend on updated forecasts, the persistence of shocks, wage dynamics, and how monetary policy transmits through the economy. The aim is a cautious, measured path toward price stability amid persistent inflation pressures.
consecutive upgrades
Since July, the ECB has implemented a total of 200 basis points in rate hikes, described as the fastest pace in the institution’s history by Lagarde. Alongside this, policymakers adjusted long-term refinancing operations to support the transmission of higher rates. This recalibration helps normalize bank lending terms and the Eurosystem balance sheet. At the next Governing Council meeting, the principles for reducing the portfolio’s bond holdings under the Asset Purchase Program will be considered in December. Lagarde emphasized that balance-sheet normalization should proceed in a measured and predictable manner over time.
Wage dynamics and inflation expectations
Lagarde pointed out that a robust labor market is likely to support wage growth, with recent data showing ongoing wage improvements. However, sustained high inflation could anchor inflationary expectations and influence wage negotiations and pricing decisions. Such a wage-price spiral would dampen real income gains across the economy and could hinder overall productive capacity.
Policy credibility and fiscal discipline
Lagarde urged governments to pursue prudent budget policies that do not fuel inflation. In line with recommendations from the European Commission and the Eurogroup, fiscal support should be selective, targeted, and time-limited so that its impact remains modest while benefiting those in need. She also urged energy-supply measures to be temporary and to avoid extending high energy costs longer than necessary. At the same time, fiscal plans should support gradual reduction of public debt without compromising growth. (Source: European Central Bank)