Rome, Jan. 17 (Xinhua) – According to Christine Lagarde, the president of the European Central Bank (ECB), persistently high inflation may delay any plans for immediate interest rate cuts in Europe. Lagarde issued this statement in an interview with Bloomberg News Wire on Wednesday, while at the World Economic Forum in Davos, Switzerland.
Lagarde cautioned against hastily cutting rates out of fear of causing inflation rates to rise again, arguing that the economic risks of doing so too quickly were greater than those of leaving them too high.
“We are making progress in our fight against inflation,” Lagarde wrote in her social media platform X post on Wednesday. “But we won’t declare victory until we are confident that inflation is sustainably at 2 percent.”
According to fresh data from Eurostat, the European Union’s (EU) statistics agency, yearly inflation in the eurozone was 2.9 percent in December, up from 2.4 percent a month earlier. This represents a significant one-month rebound after a steady decline in recent months.
The highest yearly inflation rates for December were recorded in Slovakia (6.6 percent), Croatia (5.4 percent), and Austria (5.7 percent).
In Britain, which is neither an EU country nor part of the Eurozone, inflation stood at 4 percent in December, up from 3.9 percent in November, according to the data released on Wednesday by the country’s Office for National Statistics.
This was the first increase in inflation since February 2023.
The ECB raised interest rates at ten consecutive meetings in order to combat inflation, before leaving the key deposit facility rate unchanged at 4 percent, the highest level since the euro currency was created in 1999, due to an energy crisis arising from the Ukraine situation.
The Bank of England, on the other hand, began raising rates earlier than the ECB and continued to do so for 14 consecutive meetings, reaching a 15-year high of 5.25 percent before keeping them unchanged since August.
Raising interest rates is the government’s primary tool for combating inflation, as it decreases the money supply and makes it more appealing for investors to hold onto their savings. Lowering interest rates, on the other hand, increases the money supply and can boost economic activity, but it is a balancing act that may undermine economic growth.
As inflation began to slow down in the eurozone and elsewhere in Europe towards the end of 2023, investors had started to speculate that the ECB might be ready to start lowering the record-high interest rates soon. However, Lagarde’s remark has dashed such hopes.
“Inflation rates are slowly and progressively stabilizing, and the prognosis is for a further decrease in interest rates in 2024,” said Domenico Lombardi, director of the Policy Observatory at the LUISS University in Rome. “But policymakers are being cautious because the state of European economies is fragile due to multiple economic shocks in recent years.”
Lombardi attributed the economic situation to the coronavirus pandemic, the energy crisis, and a slowdown in global trade.
Financial markets responded with negativity to the latest trends in financial policies, with most of Europe’s major stock exchanges experiencing at least a 1 percent decline in heavy trading on Wednesday. The euro currency also lost ground to the U.S. dollar and other major currencies.
