Tight monetary policy weighs on euro area economy: ECB chief

BRUSSELS, Sept. 30 (Xinhua) — The monetary policy tightening by the European Central Bank (ECB) played a part in dragging on the economy in the euro area that broadly stagnated since late 2022, the ECB president said on Monday.

Christine Lagarde made the remarks in a speech at the Hearing of the Committee on Economic and Monetary Affairs of the European Parliament here on Monday.

On top of the tight monetary policy the central bank adopted in response to lingering price hikes in the block, energy price shock and heightened geopolitical uncertainty were also blamed for the slow economic recovery.

Commenting on the economic growth that only resumed in early 2024, Lagarde pointed out that the growth was driven mainly by exports and government consumption.

The weak domestic demand, diminished business and housing investment, among other factors, have been identified as headwinds impeding recovery.

Lagarde repeated that the ECB is committed to bringing down the long-term inflation to its target level of 2 percent in a timely manner, signaling that the uphill task of taming inflation is not over yet.

“We have come a long way in the fight against inflation.”

Reflecting on the course of action against the sticky inflation, Lagarde recalled that the inflation peaked at 10.6 percent in October 2022, dropped to 5.2 percent in September 2023 and went down to 2.2 percent in August this year.

According to Lagarde, the inflation is expected to drop further in September before rebounding later this year.

“The new data available at the time of the September Governing Council meeting reinforced our confidence in the timely return of inflation to our 2% target.”

As inflation in the euro area ticked down, the ECB started to dial back its restrictive monetary policy in June, which had been in place since September 2023.

The central bank has cut key interest rates by 25 basis points for two times since June, insisting that future rate path will be data dependent.

In its latest version of Staff projections released this month, the ECB forecast that the euro area economy will grow at 0.8 percent this year.

Analysts believe that the boosted confidence about inflation outlook, as was clearly stated by the ECB chief, has paved the way for more rate cuts, which can be due as early as October.