The ECB has raised rates at the fastest pace in its history to combat inflation that hit 10.7% in the eurozone in October, the highest since statistics started being kept in 1997 and far above the bank’s goal of 2%.
Inflation has been fed by high natural gas prices caused by Russia’s cutbacks in gas supply during the war in Ukraine and by bottlenecks in supplies of parts and raw materials as demand rebounds from restrictions imposed during the coronavirus pandemic.
In response, the central bank has lifted its benchmarks by two full percentage points since July. Analysts expect more increases to come from a Dec. 15 meeting.
Lagarde cautioned governments against excessive spending on support for consumers and businesses hit by high energy costs, saying that such financial assistance needed to be temporary and targeted at the people most in need of help. Otherwise, spending could push up demand and thus inflation, and weaken incentives for people to conserve energy.
Higher central bank interest benchmarks influence the cost of lending, raising the price of credit and making it more expensive to borrow, spend or invest, thus reducing demand for goods and, in theory, restraining prices.
While higher rates are a key tool to contain inflation, their use can raise concerns about the impact on growth. Bank officials say higher rates now will avoid the need for even more drastic measures later on if inflation continues to run out of control.