Lagarde's new determination – this is how the head of the ECB wants to catch inflation

The first press conference of the European Central Bank (ECB) in the new year began with a congratulatory formula: "We congratulate the new euro member Croatia", ECB President Christine Lagarde welcomed the 20th member of the currency club. She then quickly went on to her actual message: Demonstrate determination in the fight against inflation that is still far too high in the euro area.

Lagarde has found a new verbal formula for this, which she repeated almost a dozen times during the hour-long press conference: The ECB wants to “stay on course” until consumer prices move in the direction of price stability again.

The central bank sees this goal achieved with inflation of around two percent. However, the euro area is still very far away from this with an inflation rate of 8.5 percent, even if the trend in consumer prices has been pointing downwards since the record high of 10.7 percent in October.

But the so-called core inflation rate, which does not take into account the strongly fluctuating prices for energy and food and which is therefore considered an important indicator of medium-term price trends, remains at the record value of 5.2 percent. "Alive and kicking" is the underlying inflation trend, says Lagarde.

And in any case far too high to ease off again in terms of monetary policy. "Price pressures remain strong, in part because high energy costs are spilling over into the wider economy," she warns.

For this reason, the ECB again increased the key interest rate by half a percent in February, as it did at the previous meeting in December. The main refinancing rate is now 3.0 percent and the deposit rate, at which banks borrow money from the ECB, is 2.5 percent.

Lagarde leaves no doubt that even this step is far from enough. “We have to make up more ground. We're far from finished," she says, repeating almost verbatim the message from US Federal Reserve Chairman Jerome Powell the previous evening.

The Fed, like the Bank of England, had once again raised interest rates, making it clear that the fight against inflation in the USA was far from over. Lagarde obviously doesn't want to be left behind. Instead, the president of the central bank was particularly strict: "No one should doubt that we are reducing inflation to two percent," she emphasizes combatively.

These are unfamiliar tones, especially when one considers how lenient the ECB President has been regarding soaring consumer prices in the past, despite prominent warnings from economists. Now Lagarde leaves no doubt that the ECB intends to continue the most aggressive cycle of rate hikes in its history in the fight against high inflation.

"We plan to raise interest rates by another 50 percentage points at the next meeting in March," she announced. This kind of predetermination is quite surprising. In the past, the ECB has often emphasized that it wants to make month-to-month decisions that are strictly data-driven.

And the euro guardian goes one better. When asked when the possible end of the cycle of interest rate hikes will be reached, she replies that merely raising interest rates to a restrictive level will not be enough: “We will remain at this restrictive level until we are sure that we can achieve the medium-term price target.”

However, the President of the ECB does not yet want to specify what that could mean for the next but one interest rate meeting in May. It could be an increase "of 50 basis points or 25 basis points," she says. "Whatever it takes to quickly reach our goal."

The resolute course taken by the ECB was well received on the financial markets. The leading German index Dax rose after the decision and was around 1.5 percent higher. On the other hand, the euro was almost 0.8 percent weaker against the dollar at 1.0931 dollars.

"The ECB is increasingly liking the interest rate screw," said Alexander Krüger, chief economist at Hauck Aufhäuser Lampe Privatbank, commenting on Lagarde's appearance. With the interest rate move, you are knocking on the cyclically restrictive interest rate area.

Friedrich Heinemann from the Mannheim ZEW described the central bank's course as "logical". “The ECB Governing Council is currently groping in the dark as to when a significant fall in core inflation can be expected. Over the past two years, he has had to learn how difficult it is to forecast inflation beyond a one-year time horizon,” says the economist. Now the current majority in the Council wants to see a substantial fall in the core rate before an end to the rate hikes can be expected.

Meanwhile, there are signs of a slight easing in the supply chains for industrial goods in Germany. The Munich Ifo Institute reported that the shortage of materials in industry has recently decreased.

Due to the multiple bottlenecks in raw materials and preliminary products, prices in the sector have risen sharply in recent months. In January, 48 percent of the companies surveyed by the Ifo Institute reported bottlenecks.

In December it was almost 51 percent. But many companies could only slowly work off their high order backlog, said Ifo economist Klaus Wohlrabe.

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