The head of the European Central Bank said Thursday that the bank would raise interest rates "some time after" ending its pandemic stimulus efforts later this year, even as pressure increases to follow the United States, United Kingdom and other countries in taking a harder line to combat soaring consumer prices.
People in the 19 countries that use the euro currency have seen costs increase for everything from food to fuel as inflation rose to an annual rate of 7.5% last month, the highest since statistics began in 1997.
Driven by energy prices that have soared ever higher since Russia invaded Ukraine, record inflation has sharpened attention on when the European Central Bank will take more drastic steps to control excessive price increases for consumers.
The bank said recent economic data confirmed its expectations of ending its pandemic stimulus efforts later this year and that the exact timing would depend on the economic situation.
Bank President Christine Lagarde, who previously opened the door a crack for an interest rate increase this year, said "we are sticking to our sequence." The bank has indicated that any rate increase could come only after the end of the bond purchases meant to support the economy during the COVID-19 pandemic. She said that could be "anywhere between a week to several months" to decide "an interest rate hike and subsequent hikes."
Speaking by video news conference after testing positive for COVID-19 last week, Lagarde stressed the uncertainty over the war and the bank's willingness to stay flexible in adjusting its policies, saying the experience with pandemic stimulus purchases showed "flexibility served us well."
She noted that inflation "will stay high in the near term and then moderate to some extent" amid considerable uncertainty due to the war. While higher energy prices were pushing up inflation, weaker demand caused by the war could lower the price pressures in the economy, Lagarde said.
The war has sent inflation surging to unexpectedly high levels. Prices for oil and gas have been rising on fears of a cutoff from Russia, which is the world's largest oil exporter, and as the recovery from the COVID-19 pandemic increases demand for fuel.
As inflation grows worldwide, the U.S. Federal Reserve hiked its benchmark short-term rate last month and indicated it will continue raising it sharply this year. The Bank of England has raised raised its key interest rate three times since December.
Yet the European Central Bank is in a different situation. Economists say much of the U.S. inflation is homegrown — a side effect of massive federal stimulus and support spending during the pandemic. Europe's inflation, on the other hand, is largely imported through higher oil prices, which are generally beyond the reach of interest rate policy that central banks control.
On top of that, higher inflation and supply bottlenecks are weighing on economic growth, leading to what some are calling "stagflation." A combination of slow growth and high inflation, the phenomenon poses central banks with a dilemma: that the rate hikes needed to combat inflation could also hurt growth and jobs.
Stressing consumer purchasing power has helped French presidential candidate Marine Le Pen, a far-right nationalist, narrow the polling gap against centrist incumbent Emmanuel Macron in the campaign ahead of the runoff April 24.
Inflation in Europe is expected to fall next year. How much of the current inflation will wind up being built into the economy long term is an open question.
The ECB's benchmark rates are at record lows: zero for lending to banks and minus 0.5% on deposits from banks, a penalty rate aimed at pushing them to lend the money instead.