Financial markets that have been pricing in faster-than-expected European interest rate hikes should, as they say, cool their jets. That’s according to European Central Bank President Christine Lagarde, who pushed back at speculation in an interview with Redaktionsnetzwerk Deutschland that published Friday. The comments came in response to a question as to why the central bank doesn’t just fight higher prices with interest rate increases.“This would not solve any of the current problems. On the contrary, if we act hastily now, our economies could recover significantly worse and jobs would be at risk. That wouldn’t help anyone,” she said. The euro EURUSD, -0.34% was last down 0.4% to $1.1376. European stock futures indicated a lower open for equities, on the heels of Wall Street losses after much stronger-than-expected consumer price data for January.
As U.S. bond yields surged on Thursday, in reaction to that data, European bond yields were also on the rise, with that of the German bund TMUBMUSD10Y, 2.013% up 2 basis points to 0.287%. Bets on faster, higher interest rates in the eurozone have been rising since the ECB meeting last week, where Lagarde declined to rule out a 2022 rate hike, which some economists and market observers took as a hawkish turn. In comments to European parliament members on Monday, she also pledged a”gradual” approach to interest rate changes.
“We have to keep in mind that every decision we make usually only takes full effect nine to 18 months later,” she told the German publication. We are currently monitoring the rising inflation figures, which we include in our forecast. Inflation may be higher than we forecast in December. We will analyze that in March and then see what happens next.” Lagarde said one reason for optimism on the inflation front is that much of it is down to a “sharp rise in energy prices.” Noting how oil prices CL00, -0.22% have risen from under €20 in April 2020 to around €90 per barrel currently, she said the gain was unsustainable. Data released Friday showed Germany’s annual rate of inflation rose at a slower pace in January at an annual 4.1% from December, which was the highest reading since the summer of 1992. The European Commission on Thursday lifted its eurozone inflation expectations to at 3.5% in 2022, up from its previous forecast of 2.2% published in November.
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