For months, the European Central Bank has been defying high inflation with sharp interest rate hikes. Nevertheless, this is still too high, warns ECB boss Lagarde and announces further steps. In order to stabilize the financial sector in the long term, the extent of bond purchases will also be reduced.
Europe's currency watchdogs promise a determined effort against the persistently high inflation. "We assume that we will continue to raise interest rates," said European Central Bank (ECB) President Christine Lagarde at a banking congress in Frankfurt. "Ultimately, we will raise interest rates to a level that brings inflation back to our medium-term target in a timely manner."
The ECB is aiming for price stability in the euro area in the medium term with inflation of two percent. In October, consumer prices in the currency area of the 19 countries were 10.6 percent above the level of the same month last year. "Inflation in the euro area is far too high," Lagarde said. In addition, the risk of a recession has increased, although the latest economic data had surprised positively. After much hesitation, the ECB has been trying since July to get the extremely high inflation under control by raising interest rates sharply. The key interest rate in the euro zone, which had been frozen at a record low of zero percent for years, is now 2.0 percent.
Deutsche Bank boss Christian Sewing praised Lagarde for changing course: "I would like to congratulate you on the way in which you managed to turn monetary policy around." Lagarde said the ECB will also normalize its other monetary policy tools "thus increasing the momentum of our interest rate policy." The ECB's balance sheet, which has swollen over the years as a result of billions in securities purchases, must be normalized "moderately" and "in a predictable manner": "In December we will set out the most important principles for reducing the bond portfolios in our purchase program." The Governing Council will meet again on December 15th.
In addition to fighting inflation, Sewing sees an urgent need to make the European capital market more competitive. Europe must "urgently change course if we don't want to have the future of Europe financed primarily by foreign banks," warned the Deutsche Bank boss, who is also president of the Association of German Banks (BdB).
"We need an Agenda 2030 for Europe. And the very first step must be that we finally create a real European home market," demanded Sewing. Europe cannot be competitive without a significant increase in private investment. "We will neither master the sustainable transformation nor be able to keep up technologically," warned Sewing. "That's why it's so important to finally push ahead with the capital markets union in order to create a liquid and attractive market for domestic and foreign investors."
The capital markets union is essentially about removing bureaucratic hurdles between the individual states of the European Union in order to give companies more opportunities to raise money. The EU Commission has had plans for this since 2015. At the same time, Sewing called for a readjustment of banking regulations: "It is becoming increasingly clear that the current regulatory framework is doing little to strengthen European banks."
ECB President Lagarde also stressed the importance of a resilient financial sector to face the multi-billion dollar challenges of the coming years: "Too much regulation would make banks more vulnerable to shocks and less able to support the transitions from which our future growth will depend."
