ECB President Christine Lagarde has announced a significant tightening of monetary policy in the event of a further significant increase in the risk of inflation.

"Perseverance is the secret of all triumphs," Lagarde said at the ECB forum in Sintra, Portugal, quoting French writer Victor Hugo.

"We will go as far as necessary."

Gerald Braunberger

Editor.

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Lagarde reiterated the recent decisions of the Central Bank Council, which intends to stop building up securities holdings through bond purchases at the end of June and to increase key interest rates by 0.25 percentage points at its July meeting.

A rate hike of at least 0.25 percentage points is planned for the Central Bank Council meeting in September.

New tool

Depending on how the situation develops, key interest rates are likely to continue to rise after that.

Due to the high level of uncertainty about the future, however, it is not possible to name a precise path for interest rate developments, said the President.

The ECB sees the current inflation mainly influenced by external shocks associated with price increases for commodities, food and industrial goods.

However, the recovery in domestic demand after the end of the pandemic is of growing importance for monetary policy, which is reflected, among other things, in rising prices for services.

There are no signs of the euro economy overheating, said Lagarde, but noticeable wage increases are to be expected in the coming years.

It is also to be feared that the impairments to overall economic supply caused by the war and disrupted supply chains will last longer than expected.

Lagarde reiterated the ECB's willingness to use a new instrument to ensure the smooth operation of monetary policy in all euro member countries.

To this end, the ECB is prepared to take action against economically unjustified widening of the yield spreads on government bonds in the euro zone.

What this instrument might look like is the subject of speculation in Sintra.

The answer is not obvious because the new instrument must not counteract the fight against inflation;

moreover, it must be compatible with the mandate of the ECB, which does not allow state financing through monetary policy.

For some experts, ECB control over government bond yield spreads is a prerequisite for a tightening of monetary policy, since very sharp increases in government bond yields on the financial markets could raise doubts about the solidity of highly indebted countries.