IMF chief Lagarde
As ECB rates rise, borrowing costs increase disproportionately for countries like Italy, Spain or Portugal as investors demand a bigger premium to hold their debt. Image Credit: Reuters

Brussels: European Central Bank President Christine Lagarde said interest rates will be increased as much as is required to bring inflation back to 2 per cent.

“We are sending a clear message to companies, employees and investors: inflation will return to our target value of 2 per cent in the medium term,” she said in an op-ed for Germany’s Funke Mediengruppe. Measures taken so far “are already having an impact on interest rates across the euro area.”

The comments come a day after the ECB raised rates more than expected, ending eight years of negative interest rates to fight inflation that hit 8.6 per cent in June and is expected to accelerate further. The 50 basis-point hike brought the deposit rate to 0 pere cent, ending eight years of negative rates. Investors see about 113 basis points of addition ECB rate increases by year-end, according to market bets.

“We will raise interest rates for as long as it takes to bring inflation back to our target,” Lagarde added. The Governing Council will “decide on the right pace for our next steps based on the newly available data.”

Prices are driven higher largely due to factors that are beyond the control of central bankers, Lagarde said. But the ECB’s actions were aimed at making sure that the inflation rate “doesn’t remain high permanently,” which could happen if a wage-price spiral were to materialize, the president said.

The new tool to contain market turmoil that the ECB presented on Thursday “will maintain the consistency of our monetary policy, helping to keep prices stable over the medium term,” Lagarde said.