“It will still take some time before inflation is completely eliminated from the economy. Not everything will go well until then. Vigilance, commitment and persistence will be necessary on this path”, highlights the president of the ECB in an article in the German Rheinische Post where she explains why the ECB carried out the first rate cut.
“Interest rates must remain restrictive for as long as necessary to ensure long-term price stability. In other words: we have to keep our foot on the brake for a while, even if not as firmly as before”, emphasizes Lagarde and adds:
“Two years ago we started increasing our key rates because inflation was too high. The situation has improved now. Although some prices continue to rise sharply, especially in the services sector, overall inflation has decreased significantly. It is currently on track to reach 2% next year. Our objective is 2% inflation in the interests of price stability.
As inflation fell, the European Central Bank (ECB) was able to reduce interest rates. Therefore, on Thursday we reduced our key interest rate by 0.25 percentage points. This means that individuals can now borrow money at a cheaper price than the bank and companies can pay less for their investment loans.
Our decision also marks an important moment in our fight against inflation. We started raising interest rates in July 2022. This was part of a phase that experts call “tightening monetary policy”. To put it metaphorically: we hit the brakes. We raised interest rates faster than ever before, by 4.5 percentage points in just over a year. We took decisive action because inflation rose too much. In October 2022 it recorded the highest value of 10.6%.
The invasion of Ukraine
One of the reasons for the rapid rise in inflation was Russia’s unjustified invasion of Ukraine, which sent energy and food prices soaring. Furthermore, many companies were experiencing increasing difficulties in obtaining equipment, materials and spare parts. This worsened problems that had already arisen during the pandemic.
There was also a real danger that people would become accustomed to high inflation as the new normal. This would mean that companies would refer to it when setting their prices and workers when negotiating wages. If that were to happen, high inflation would become permanent in the economy.
Therefore, we had to do whatever was necessary to avoid this danger. It is our duty to the people of Europe to keep inflation low and stable. We know that the rise in inflation and the resulting increases in interest rates have had a negative impact on families and companies. The cost of corporate loans and real estate loans has risen sharply. Everything became more expensive, but income – salaries and pensions – did not keep pace, at least not initially.
Consistent measures
With our consistent measures, we guarantee that high inflation will not last long. In September 2023, inflation fell to 5.2%, about half the previous year’s peak.
This allowed us to begin the next phase of our monetary policy: a phase in which we kept interest rates unchanged. To maintain our image: we don’t press the brakes harder, but we don’t let go of them either. Although we were confident that interest rates were helping to reduce inflation, inflation was simply too high for that to be clear. In this environment, it would be counterproductive to start cutting interest rates too quickly.
Progress in many areas
But we are now seeing progress in many areas: inflation has fallen to 2.6%, which means it has halved again. It is currently on track to hit the 2% mark by the end of next year. Our monetary policy contributes significantly to this. By reducing interest rates, we decided to reduce the degree of tightening of monetary policy.
However, it will still take some time before inflation is completely eliminated from the economy. Not everything will go well until then. This path will require vigilance, commitment and perseverance.
For this reason, interest rates must remain restrictive for as long as necessary to ensure long-term price stability. In other words: we have to keep our foot on the brake for a while, even if not as firmly as before.
The determining factor in our future monetary policy decisions will be whether we can continue to see inflation return to our target rate in a timely manner, whether price pressures on the economy as a whole ease, and whether our monetary policy continues to have an anti-inflationary effect. These factors will determine when it is time to release the brake further.
We have made great progress, but our fight against inflation is far from over. As guardians of the euro, we are committed to ensuring low and stable inflation for the benefit of everyone in Europe.”