The President of the European Central Bank spoke of the possibility of a recession

Lagarde: Growth will slow in the eurozone to 0.9% next year

Christine Lagarde painted a bleak picture of the state of the European economy.

Reuters

In an interview with the European Central Bank Magazine, the President of the European Central Bank, Christine Lagarde, painted a bleak picture about the situation of the European economy, and about the high inflation driven by high energy prices and the war in Ukraine, which forced the euro area to raise interest rates for the third time, and she spoke about the possibility of a recession. under these circumstances.

The following are excerpts from the interview:

■ How would you describe the state of the eurozone economy at the moment?

■■ Inflation is still very high in the Eurozone as a whole, especially in Latvia, and as you know the inflation rate in Latvia was 21.8% in October, which is much higher than the Eurozone average of 10.7%.

Higher energy and food prices continue to be the main drivers of higher prices, and we increasingly see these higher energy costs feeding into more and more sectors of the economy.

With all of this in mind, we decided in the last two weeks to raise interest rates for the third time in a row, and we expect to raise rates further to make sure that inflation returns to our medium-term target of 2% in due course.

■ How do you respond to critics who say the ECB may be too aggressive with its current rate hikes?

Aren't you afraid that raising interest rates too much too quickly will hurt business and stunt future growth?

■■ It is true that the likelihood of a recession has increased and uncertainty remains high, and under these circumstances we must all do our work.

The central bank should focus on its powers, our job is price stability, and we should achieve that using all the tools at our disposal.

After all, persistently high rates of inflation are more harmful to society, because they make everyone poorer.

■ What can we expect in the future?

Is there a certain interest rate level that you think you will need to achieve to control the situation in the eurozone economy, or are there levels that you will not be able to reach, or does it all depend on the economic situation?

Are you going to look only at inflation or other factors as well?

■■ We are targeting a rate that will meet our medium-term inflation target of 2%, we will have more rate increases in the future, we will decide the path forward, and we will increase our rate pace on a meeting-by-meeting basis.

■ How do you assess the financial discipline and the financial sector in Latvia?

Do you see some risks to its economy?

■■ Latvian government debt reached 41.6% of gross economic product, or GDP at the end of the second quarter of this year, which is well below the eurozone average of 94.2%, one of the biggest risks I see, not only for Latvia, but for the region the whole euro, which is the high level of uncertainty that we are experiencing as a result of the russian war in ukraine.

Large parts of inflation is driven by rising energy costs, and the limited view of how these conditions will evolve makes it difficult for households and businesses to plan for the future.

A coordinated EU response to providing security of energy supplies could lead to a change in this area, for example through joint purchases in the EU, the EU countries would avoid outbidding each other in the international energy market.

■ Can you give some predictions for the Eurozone for next year?

How will the economic situation in the region?

■■ The latest round of forecasts was in September, with baseline projections showing that the inflation rate was 8.1% this year, 5.5% next year, 2.3% in 2024, and growth is expected to slow to 0.9% next year. , and to reach 1.9% in 2024. And given the uncertainty in the euro area due to the Russian war in Ukraine, we also expected a bearish scenario assuming that the war will last for a long period, which means the continuation of geopolitical tensions, and the bearish scenario predicts slightly higher inflation rates for this year and year next, to reach 2.7% in 2024. While this scenario still exists, the eurozone economy is expected to grow this year, but it will witness a contraction next year, and a return to growth in 2024. We will have a more complete picture in December in the next round of forecasts .

The downside scenario predicts slightly higher inflation rates for this year and next, reaching 2.7% in 2024. 

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