Portugal Colonial - ECB sees longer inflation but stands pat on policy

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ECB sees longer inflation but stands pat on policy
ECB sees longer inflation but stands pat on policy

ECB sees longer inflation but stands pat on policy

European Central Bank chief Christine Lagarde said Thursday that record inflation would stay high longer than expected, but the ECB stuck to its ultra-loose monetary policy as it sees prices cooling this year.

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The inflation rate unexpectedly rose to 5.1 percent in the euro area in January, an all-time high since records for the currency club began in 1997 and well above the ECB's two-percent target.

"Inflation is likely to remain elevated for longer than previously expected," Lagarde said in a press conference following the meeting of the bank's 25-member governing council.

The surge could largely be ascribed to the soaring cost of energy, Lagarde said, but along with supply bottlenecks, the driving forces for price rises were expected to "subside" this year.

But the former French finance minister acknowledged that the "situation has changed" and that the "risks to the inflation outlook are tilted to the upside, particularly in the near term", saying it could go higher.

"We need to continue to monitor very carefully," she said.

At the bank's last meeting in December and on several occasions since, Lagarde had said that it was "very unlikely" that the ECB would change its rates in 2022.

On Thursday, the ECB president declined to repeat that claim, saying she would "never make pledges without conditionalities", and that the bank's next moves would be "data dependent".

- Slower pace -

The steep rise in prices seen globally has induced other central banks to act, with the Bank of England announcing a second straight rate hike on Thursday.

The US Federal Reserve is widely expected to follow suit soon after signalling multiple rate hikes this year.

On the other side of the Atlantic, wage increases have been more visible than in the eurozone, driving US inflation as high as seven percent in December.

That and the comparatively lower importance of energy prices have encouraged the Federal Reserve to take tough action.

ECB policymakers left their interest rates at record lows, including a negative deposit rate that charges financial institutions to park their cash with the central bank overnight.

The ECB's more cautious response is predicated on its forecasts that see inflation dropping below the central bank's two-percent goal in 2023 and 2024 and a promise to end stimulus bond purchases before hiking rates.

At its last meeting in December, the ECB announced a "step-by-step" reduction in its pandemic emergency bond-buying programme.

It will not update its growth and inflation projections until its next meeting in March, when the figures would be "examined in more depth", Lagarde said.

However, the eurozone was "getting closer to target" inflation over the medium-term set by the ECB, Lagarde said.

The rising cost of living was a "hardship" for those "who have to fill up the tank and who have to put food on the table", Lagarde said.

- Ukraine concerns -

The eurozone economy reached its pre-coronavirus pandemic level in the fourth quarter of 2021, but growth could be "subdued" through 2022 due to a similar set of factors as those driving inflation, Lagarde said.

The risks to the economic outlook are "broadly balanced over the medium term," said Lagarde.

But while "uncertainties related to the pandemic have abated somewhat, geopolitical tensions have increased," she said, hinting at tensions between Moscow and the West over the massing of Russian troops on the border with Ukraine.

"The geopolitical clouds that we have over Europe, if they were to materialise, would certainly have an impact on energy prices" and the rest of the economy, Lagarde said.

Widespread shortages of raw materials and key components -- everything from wood to semiconductors -- have also weighed on production and added to the upward pressure on prices.