Lagarde warns that inflation will rise again in the coming months and insists on "not claiming victory" yet

The president of the European Central Bank (ECB), Christine Lagarde, warned this Monday that inflation will rise slightly again in the coming months due to the 'step effect' and has made it clear that it is not yet time to “declare victory” in the fight to tame prices.

This is what the highest authority on monetary policy in the euro zone has expressed in an intervention before the committee on the subject in the European Parliament.. Lagarde expects inflationary pressures to continue weakening in the future, although she recognizes that price increases will accelerate again in the coming months. Pressures that increasingly come from within the euro zone rather than from outside and in which salaries – which seek to recover part of the purchasing power lost during these years – play an increasingly leading role.

This rise in inflation will occur just one year after price increases reached their maximum in October 2022. Since then, inflation in the eurozone has been on a downward path, reaching 2.9% last month.. Starting in November, this favorable effect that arises when comparing current prices with those of last year, which were in crescendo, will disappear, which will drag the eurozone CPI upwards, although moderately.. That is, a good part of the expected acceleration of price increases will be due to a statistical effect.

This phenomenon is already being seen in Spain, where inflation hit the bottom in June of this year (1.9%) and has since risen slightly to reach 3.5% in October.. A figure somewhat above the 2% target pursued by the ECB, but far from the runaway double-digit inflation seen last year.

“We have come out of that period of galloping inflation,” said Lagarde, whose concern now focuses on the uncertainty surrounding the prospects for price growth in the medium term.. “It is not that I am claiming victory, it would be premature, but we have managed to bring inflation down from very high figures to others that are much closer to our objective,” added the president of the ECB.

Lagarde is aware of the difficulties that the historic rate increase has meant for households. But he points out that the objective enshrined in the European treaties for the ECB is exclusively price stability. Furthermore, he added, if these efforts had not been made “we would be in much more complicated situations for citizens, with uncontrolled inflation.”

No news until December

The big unknown now surrounding the ECB is what it will do with interest rates when its next monetary policy meeting arrives, scheduled for two weeks from now.. In it, the central bank will have to decide whether to repeat the October pause – the option that the markets are opting for at the moment – or raise rates again. For the conclave, the Governing Council will have new medium-term macroeconomic projections, which will be key when deciding.

In this sense, Lagarde has limited herself to the usual mantra that has been repeated by the central bank since she decided to pause the increases.. On the one hand, he has insisted that maintaining rates at current levels for a sufficient period of time will help restore price stability.. On the other hand, it has guaranteed that the decisions taken by the ECB in the future will guarantee that interest rates will be sufficiently restrictive for as long as necessary.. Two messages that seek to reinforce the image of the ECB's commitment to inflation and clear up doubts about hypothetical rate cuts.

For now, the possibility of short-term interest rate cuts seems ruled out. Recently, Lagarde pointed out that it is something that will not be seen “in the coming quarters”. However, investors disagree. With a euro economy that has been stagnant for a year now, the markets are betting that the central bank will approve the first rate cuts in the second half of next year.

Complete the reform of fiscal rules

Beyond monetary policy, Lagarde has made a new call to the Twenty-Seven to complete the reform of fiscal rules, which will be back in force in 2024. “We are concerned that the budget framework has not been approved, we hope that it will be done as soon as possible to leave this uncertainty behind,” said the president of the ECB in reference to the issue. The president of the ECB has once again insisted on the countries to withdraw the support measures adopted in 2021 and 2022 to clean up public accounts and return them to a path of sustainability.