How much will the European Central Bank raise interest rates? Its president, Christine Lagarde, has acknowledged before the European Parliament’s Economy Commission that it is not known. It is very likely that the entity works with assumptions, but, in any case, avoids disclosing them in public. Lagarde, to questions from the MEPs, has stated that, meeting by meeting, the ECB will be looking for that neutral point in which demand is not fed but the economy is not slowed down either. And what is that neutral point? It is not known. Or, at least, it doesn’t count.
“I don’t know what the real rate will be”, said the president of the ECB: “But we are convinced of reaching that neutral point, where the economy is neither slowed down nor stimulated. We will go from meeting to meeting, analyzing the data, to reach the 2% inflation target. Much of the inflation is due to supply, but if we increase demand we will increase inflation. We have to find the neutral point”.
Lagarde has pointed out that those supply problems that trigger inflation are basically energy prices and bottlenecks in the supply of goods. Regarding the former, he has stated: “I cannot reduce gas prices, I would like to. Perhaps a good reform would be more useful, but it is not my competence”, and he added: “Any action that governments take to deal with energy disorders would help a great deal. Budget policy has to be designed to help the most vulnerable and exposed, and those aids must be temporary and withdrawable. And, if there is space to achieve it, the States must invest in green energy programs”.
“I still think supply is a more important driver of inflation than demand,” Lagarde said: “If you look at the economic recovery, demand gave us a boost, but it has been fading away. The high demand in services, which was greatly boosted in the summer, is falling. You have to be careful, because those bottlenecks will be removed, but it is taking longer than expected. Demand is something that we must understand and analyze in detail. These are unprecedented shocks and our response has to take this into account. There are very high inflation figures. If we have inflation of supply and demand, and we continue with an accommodative policy, the result will be that inflation grows”.
Socialist MEP Jonás Fernández asked Lagarde about the possible effects of the new anti-fragmentation mechanism, the TPI, approved at the end of June to avoid debt crises in countries like Italy, Greece or Portugal, for example. “The protection mechanism”, Lagarde responded, “has been created so that monetary policy is throughout the euro zone, and it is activated by evaluating risk, eligibility and proportionality. The decision to activate it or not will depend on the seriousness of the risk and the success of the operation. In any decision, we are going to take into account the situation in that market to correct the dynamics of the market”.
The MEP from En Comú Podem, Ernest Urtasun (Greens), asked about the remuneration of bank reserves derived from the rate hike. “When we created these bank refinancing systems”, Lagarde acknowledged, “the idea was to encourage banks not to reduce the financing of the economy. It was important to offer incentives. One of the conditions to be eligible for these more interesting rates was to support the economy at the same level as before COVID. We must ensure that the measures are proportional, and we are studying the remuneration of the reserves, taking into account the long-term acquisition program.