Interest hikes won't drop energy prices: ECB chief

A European Central Bank (ECB) rate hike will not reduce energy prices, the cause of half of the continent’s inflation, ECB president Christine Lagarde said on Sunday (Apr 24), even as the institution faces pressure to raise interest rates.

“Inflation in Europe is very high at the moment. Fifty per cent of that is related to energy prices” and Russia’s war in Ukraine “has dramatically increased those prices,” Lagarde told US network CBS in an interview.

“If I raise interest rates today, it is not going to bring the price of energy down.”

Central banks around the world have largely begun raising interest rates in response to inflation, in order to increase the cost of credit to slow consumption - and therefore ease the pressure on prices.

Lagarde again defended the position adopted by the ECB, which seeks to gradually withdraw its accommodation policy intended to support eurozone economies during crisis.

“We will be interrupting the purchases of assets in the course of the third quarter, high probability that we do so early in the third quarter,” said the French Lagarde, who is in Washington attending finance meetings.

“And then we will look at interest rates and how and by how much we hike them.”

Lagarde also stressed that the distinct policies adopted by Europe and the United States in the face of the coronavirus pandemic led to the different nature of inflation on both sides of the Atlantic.

In Europe, she said, “the focus was predominantly on keeping the jobs, not necessarily sending the checks”, and thus allowing people to maintain employment despite the downturn and return to work when business picked back up.

But in the United States, the labour market is quite tight with many vacancies. “We don’t have that in Europe at the moment,” Lagarde said.

That tightness “is clearly contributing to possible strong inflation and second round effect where prices go up, wages go up, short supply of labour, wages continue to go up, and that feeds back into prices”, she said.

“That’s one of the differences between our 2 economies.”

Inflation reached 7.5 per cent in March in the eurozone, and 8.5 pe cent in the United States. AFP