“How high interest rates go will depend on the data,” Lagarde said. “We will look at all the data, including inflation, labor costs and expectations, that we will rely on to determine the monetary policy path of the central bank.”
Ms Lagarde stressed that bringing inflation back to target was the best thing we could do for the economy, and the good news was that headline inflation was receding in European countries, and she did not expect any eurozone countries to fall into recession in 2023.
And a slew of recent data has shown the euro zone economy doing better than expected. The eurozone economy recorded positive quarter-on-quarter growth in the final quarter of last year, reducing fears of a recession in the region.
On the inflation front, eurozone inflation fell to 8.5% in January from 9.2% in December. While the survey suggests inflation will continue to fall, it is not expected to reach the ECB’s 2 per cent target until at least 2025.
For now, most ECB officials remain hawkish. ECB executive board member Isabel Schnabel said last week that there was still a long way to go to beat inflation and that more would be needed to bring it back under control.
The head of Germany’s central bank, Joachim Nagel, warned against underestimating the euro zone’s inflation challenge and said more sharp interest rate rises were needed. “If we ease too soon, there is a significant risk that inflation will persist. In my view, more significant rate hikes are needed.”
ECB governing Council Olli Rehn said underlying price pressures were beginning to show signs of stabilising, but he believed current inflation was still too high and further rate rises were needed to ensure a return to the bank’s 2% inflation target.
Earlier this month, the ECB raised interest rates by 50 basis points as expected and made clear it would raise rates by another 50 basis points next month, reaffirming its commitment to fighting high inflation.