Inflation still ‘way too high’ – bond yields are picking up

Christine Lagarde at the World Economic Forum in Davos

The ECB has raised interest rates four times since July 2022.

(Photo: dpa)

Frankfurt According to its President Christine Lagarde, the European Central Bank (ECB) will not let up in its fight against high inflation. The rate of inflation is still far too high, Lagarde said on Thursday in a panel discussion at the World Economic Forum in Davos.

“We will stay the course until we are in the restrictive zone long enough to bring inflation back to 2% in time,” she said. Economists understand a restrictive level as an interest rate level with which an economy is slowed down.

At its meeting on December 15, the ECB decided to raise interest rates by half a percentage point. In addition, Lagarde promised further increases of the same amount for the next few meetings. In response to this clear signal, bond yields in the euro area rose briefly. Recently, however, they have given way again significantly.

The markets are now anticipating lower rate hikes. Lagarde opposed this expectation relatively clearly in Davos. In response to a question from the audience as to why the course of the central bank might be underestimated on the financial markets and why the ECB could not convince the markets, she replied: “I would suggest that they reconsider their position. I think they would be wise to do that.” Stock and bond prices responded with losses, while bond yields rose.

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The minutes of the Council meeting in December, published on Thursday, also point in a similar direction to Lagarde’s statements. It states that there was “broad agreement at the meeting that the monetary policy stance must be tightened decisively”. The interest rate development priced into the markets is probably not restrictive enough to bring inflation back to the target level of two percent in good time.


The economist at the major Dutch bank ING, Carsten Brzeski, also sees the protocol as a signal for further tightening. “It’s clear that the ECB is far from done raising interest rates,” he says. In his opinion, the advocates of a tougher monetary policy are now in the majority on the Governing Council. Brzeski says another rate hike of half a percentage point in February is “a done deal” and a move of the same magnitude in March is “very likely”.

The minutes also reveal that the decision to raise interest rates by half a percentage point in December was very controversial. Many council members would therefore have wished for a stronger increase. “A large number of members initially spoke out in favor of raising the key ECB interest rates by 75 basis points,” it said. According to the minutes, some council members even stuck to this position to the end.

According to the report of the session, the compromise finally reached was considered to be somewhat equivalent to an increase of 0.75 percentage points. The reasoning behind this: A less step-by-step approach and instead a more steady approach is compatible with more persistent inflation and persistently high uncertainty.

More: Interest rates in Japan remain low – investors are once again triggering significant market movements

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