Lagarde is not in the business of changing

The European Central Bank (ECB), caught between the sword of high inflation and the wall of banking fears, has chosen the most dangerous path. Frankfurt officials have argued that stubbornly high consumer prices are the reason for going ahead with their planned 50 basis point increase, taking the deposit facility to 3% and interest rates to 3.5%. Financial instability and a slowing economy may soon persuade them to take a softer path. During her press conference, ECB President Christine Lagarde strove to distinguish between the institution’s two main tasks: fighting inflation and ensuring financial stability. Regarding the former, the central bank now expects consumer prices excluding energy and food to rise 4.6% in 2023, more than double its 2% target and above the 4.2% forecast. in December. And as for the second, Lagarde praised the banking reforms implemented since the 2008 financial crisis, stressed that there was no shortage of liquidity among European lenders and said that the ECB was ready to draw on its great “toolbox”. In less than a week, two major central banks – the US Federal Reserve and the Swiss National Bank – have had to take action to prevent a broader banking crisis, but the ECB’s message was clear. At the moment, stamping out inflation is more important than helping the banks.

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However, the two roles could soon converge. The monetary tightening that has caused interest rates to reach their highest level since 2008 in eight months will weigh down growth in the euro zone in 2024 and 2025. Lagarde confirmed this by declaring that the large rise in rates is beginning to be felt in the real economy, with more expensive mortgages and stricter business lending.

The weak reaction of European bank stocks to the rate hike, and the fact that the next decision doesn’t have to be taken until May, gives the ECB some time to consider whether to back down on rate hikes. If more banking problems arise, or the economy slows further, Lagarde could be forced to do so.

FOR MORE INFORMATION: BREAKINGVIEWS.REUTERS.COM. The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation is the responsibility of EL PAÍS

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