Central banks around the world have largely begun raising interest rates in response to inflation to increase the cost of credit to slow consumption and therefore ease the pressure on prices.
This is on the back of intensified war between Russia and Ukraine which started two months ago.
But European Central Bank president Christine Lagarde has said otherwise.
According to her, the rate hike will not reduce energy prices, even as the institution faces pressure to raise interest rates.
Fifty percent of inflation in Europe is linked to energy prices.
“Inflation in Europe is very high at the moment. Fifty percent of that is related to energy prices” and the Russia-Ukraine conflict “has dramatically increased those prices,” Lagarde said.
“If I raise interest rates today, it is not going to bring the price of energy down.”
Lagarde again defended the position adopted by the ECB, which seeks to gradually withdraw its accommodation policy intended to support eurozone economies during crisis.
“We will be interrupting the purchases of assets in the course of the third quarter, high probability that we do so early in the third quarter,” said Lagarde, who is in Washington attending finance meetings.
“And then we will look at interest rates and how and by how much we hike them.”
Lagarde also stressed that the distinct policies adopted by Europe and the U.S. in the face of the coronavirus pandemic led to the different nature of inflation on both sides of the Atlantic.
In Europe, she said “the focus was predominantly on keeping the jobs, not necessarily sending the checks,” and thus allowing people to maintain employment despite the downturn and return to work when business picked back up.
But in the U.S., the labor market is quite tight with many vacancies. “We don’t have that in Europe at the moment,” Lagarde said.
That tightness “is clearly contributing to possible strong inflation and second round effect where prices go up, wages go up, short supply of labor, wages continue to go up, and that feeds back into prices,” she said.
“That’s one of the differences between our two economies.”
Inflation reached 7.5 percent in March in the eurozone, and 8.5 percent in the United States.
