# ECB’s Lagarde raises prospect of rate hikes beyond neutral level
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-20
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: ECB President Lagarde warns of potential interest rate
Meta Description: ECB President Christine Lagarde signals possible need to raise interest rates to tackle rising inflation and cool demand, amid growing risks.
URL: https://financedigest.com/ecbs-lagarde-raises-prospect-of-rate-hikes-beyond-neutral-levelhtml

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FRANKFURT (Reuters) -The European Central Bank may need to raise interest rates to a level that restricts economic growth in order to cool demand and combat unacceptably high inflation, ECB President Christine Lagarde said on Tuesday.

The ECB has been raising rates at the fastest pace on record but inflation is still rising and even longer-term expectations, a key focus for policymakers, are starting to move above the bank’s 2% target.

“If there were evidence that high inflation risked de-anchoring inflation expectations, then the policy rate that is compatible with our target would lie in restrictive territory,” she said in a speech.

She added that if the current supply shock caused by expensive [energy lowered](https://www.financedigest.com/ahold-turns-to-solar-panels-lowers-thermostats-to-save-energy.html "Ahold turns to solar panels, lowers thermostats to save energy") the bloc’s potential, the ECB would also have to act to cool demand.

Policymakers have talked about pausing [rate hikes](https://www.financedigest.com/wall-street-slips-dollar-gains-as-fed-seen-hiking-rates-in-may.html "Wall Street slips, dollar gains as Fed seen hiking rates in May") once the ECB hits the so-called “neutral” level, that neither stimulates nor holds back growth, but a growing number of rate-setters now see the risk that rates will have to go higher.

The nominal neutral is seen somewhere between 1.5% and 2%, well above the [ECB’s 0.75% deposit rate](https://www.financedigest.com/instant-view-ecb-sticks-with-big-rate-hike-even-as-bank-fears-roil-markets.html "Instant View: ECB sticks with big rate hike even as bank fears roil markets").

While Lagarde said medium-term [expectations were “relatively” well anchored around the target](https://www.financedigest.com/puma-expects-q2-sales-growth-below-full-year-target.html "Puma expects Q2 sales growth below full-year target"), it would be “unwise” to take this for granted.

She noted that consumers’ inflation expectation is [rising](https://www.financedigest.com/uk-inflation-rate-unexpectedly-rises-to-10-4-in-february.html "UK inflation rate unexpectedly rises to 10.4% in February") rapidly and the euro zone was also shifting from a low inflation environment to an extremely high one, both a risk to longer-term expectations.

Lagarde also warned about the dangers of high [price growth triggering a wage-price spiral that would entrench inflation](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc-2.html "UK shop price inflation hits record 8% in January: BRC") in a hard to break cycle.

The ECB president, however, provided no clues about the October [rate hike](https://www.financedigest.com/stocks-falter-as-economic-worries-nag-nz-delivers-big-rate-hike.html "Stocks falter as economic worries nag, NZ delivers big rate hike") and only repeated that the ECB will decide its next moves meeting by meeting.

Investors are currently split between a 50- and a 75-basis point [rate hike](https://www.financedigest.com/dollar-hits-one-month-high-against-yen-as-traders-bet-on-fed-rate-hike.html "Dollar hits one-month high against yen as traders bet on Fed rate hike") in October, with subsequent increases seen at every meeting through next spring.

[(Reporting by Balazs KoranyiEditing by Francesco Canepa and Richard Chang)](https://www.financedigest.com/u-n-climate-change-report-sounds-code-red-for-humanity.html "U.N. climate change report sounds ‘code red for humanity’")


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