Volkswacht Bodensee - ECB chief opens door to 2022 rate hike as inflation soars

The "situation had indeed changed" Lagarde said in a press conference after inflation unexpectedly rose to 5.1 percent in the euro area in January, an all-time high since records for the currency club began in 1997 and well above the ECB's two-percent target.

"Inflation is likely to remain elevated for longer than previously expected," Lagarde said, following a meeting of the bank's 25-member governing council.

The surge could largely be ascribed to soaring energy costs, Lagarde said, but along with supply bottlenecks, the driving forces for price rises were expected to "subside" this year.

But the former French finance minister acknowledged that "risks to the inflation outlook are tilted to the upside, particularly in the near term", saying it could go higher.

"We need to continue to monitor very carefully," she said.

At the bank's last meeting in December and on several occasions since, Lagarde had said it was "very unlikely" that the ECB would raise its ultra-low rates in 2022.

On Thursday, the ECB president declined to repeat that claim, saying she would "never make pledges without conditionalities", and that the bank's next moves would be "data dependent".

In doing so, Lagarde had "opened the door... to a rate hike this year", said Carsten Brzeski, head of macro at the ING bank.

- Slower pace -

The steep rise in consumer prices seen globally has induced other central banks to act, with the Bank of England announcing a second straight rate hike on Thursday.

The US Federal Reserve is widely expected to follow suit soon after signalling multiple rate hikes this year.

On the other side of the Atlantic, wage increases have been more visible than in the eurozone, driving US inflation as high as seven percent in December.

That and the comparatively lower importance of energy prices have encouraged the Federal Reserve to take tough action.

ECB policymakers held their interest rates at record lows on Thursday, including a negative deposit rate that charges financial institutions to park their cash with the central bank overnight.

The ECB's more cautious response is predicated on its forecasts that see inflation dropping below the central bank's two-percent goal in 2023 and 2024 and a promise to end stimulus bond purchases before hiking rates.

At its last meeting in December, the ECB announced a "step-by-step" reduction in its vast bond-buying programme.

Lagarde pushed back expectations of any policy adjustment until the ECB's next meeting in March, when governing council members will have new growth and inflation projections to work with.

"We will not be complacent, but we're not going to be rushed into a process", Lagarde said, adding that inflation was "getting closer to target" over the medium-term.

The rising cost of living was a "hardship" for those "who have to fill up the tank and who have to put food on the table", Lagarde added.

- Ukraine concerns -

The eurozone economy reached its pre-coronavirus pandemic level in the fourth quarter of 2021, but growth could be "subdued" through 2022 due to a similar set of factors as those driving inflation, Lagarde said.

The risks to the economic outlook are "broadly balanced over the medium term," said Lagarde.

"The geopolitical clouds that we have over Europe, if they were to materialise, would certainly have an impact on energy prices" and the rest of the economy, Lagarde said.

M.Ouellet--BTB