Brochure Getty Images News Getty Images European Central Bank President Christine Lagarde downgraded worries about a recession in the eurozone on Tuesday, saying her team was ready to raise interest rates faster – if needed – if inflation continued to soar. Central bank executives gather in Portugal for their annual conference, focusing on rising consumer prices. The eurozone is expected to see nominal inflation of 6.8% this year – well above the ECB ‘s target of 2%. This comes at a time when economists are assessing whether or not the eurozone will emerge from recession this year. The region has seen growth levels worsen amid an energy crisis, sanctions on Russia and food insecurity – just to name a few. “We have significantly downgraded our growth forecasts for the next two years. But we still expect positive growth rates due to domestic security reserves against the loss of dynamic growth,” Lagarde told the Sintra Forum on Tuesday. The European Central Bank held an emergency meeting earlier this month to announce a new tool to address the risks of fragmentation in the euro area. However, market participants were left with questions about the timing and size of the mechanism. Investors are worried about high inflation and are watching closely what the ECB says and does. Investors are also wary of high debt levels in Europe, especially in Italy, and how a return to tighter monetary policy could be an economic constraint for these economies. “If the outlook for inflation does not improve, we will have enough information to move faster. That commitment, however, depends on the data,” Lagarde added on Tuesday.
Increase or decrease interest rates?
Speaking to CNBC, Erik Nielsen, UniCredit’s global chief economist, said he did not expect this year’s forum to address inequalities between levels of public debt, but would focus more on the future of monetary policy. “Can you really raise interest rates in a recession even if inflation is high? That would be unusual,” he said. The ECB confirmed in early June its intention to raise interest rates next month and then again after the summer. This is likely to restore the ECB’s deposit rate out of negative territory and mark a huge moment for the central bank, which has kept interest rates below zero since 2014. However, there are questions about whether Lagarde will continue with multiple interest rate hikes as the region’s growth prospects darken. The ECB forecast 2.8% of GDP for the eurozone in June, but economists are beginning to talk about the prospect of a recession by the end of the year due to Russia’s invasion of Ukraine and its impact on the global economy. According to Nielsen, in the same position is the Federal Reserve of the United States. “There is a very good chance the Fed will end up cutting interest rates towards, say, the end of next year or something, and that’s the story of the recession again,” he said. “They can not do what they say, they will do the next and maybe another hike, but then it will be very difficult for them, both in the US a little later and in Europe,” he added. .
