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Don't doubt that the ECB will fight inflation - Christine Lagarde

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(Kitco News) - While inflation appears to have peaked in the eurozone, it is expected to remain too high for too long and will be a major focus for the European Central Bank even as the world faces a potential global financial crisis.

"We are determined to fight inflation," said ECB President Christine Lagarde. "That should not be in doubt."

Although there is significant uncertainty brewing within the European economy, Lagarde said that more ground needs to be covered to bring inflation down to its 2% target. She noted that core inflation, which rose to a record high of 4.6% last month, remains a "concern."

Lagarde's comments come after the ECB modestly surprised markets by raising interest rates by 50 basis points across the board. Ahead of the announcement, markets were pricing in a 50/50 chance of an aggressive rate hike. Interest rate expectations have been extremely fluid in the last week as markets react to turmoil in the global financial markets. While the central bank said it is monitoring current market tensions, Lagarde downplayed the growing risks in financial markets.

She noted that because of reforms implemented after the 2008 Great Financial Crisis, the European banking system is resilient, with plenty of liquidity.

"Banks are in a completely different position from 2008," she said.

However, she also noted that because of growing financial market tensions, "It's not business as usual."

Although the ECB doesn't see any major contagion issues brewing in the banking sector, Lagarde said the ECB will continue monitoring market tensions. She added that the ECB stands ready to unleash a "toolbox" full of instruments.

Lagarde said that with the central bank ready to act if market conditions worsen, it can focus on both price and financial stability.

"We are raising price stability and, separate from that, we are monitoring market tensions, ready to provide additional facilities," she said. "We have the tool ready to activity if and when necessary."

While Lagarde was steadfast in her commitment that Thursday's 50 basis point move was the appropriate step, she provided no forward guidance, noting the high level of uncertainty.

"We know we have a lot of ground to cover if our baseline outlook were to persist," she said. "But there is a high level of uncertainty. It's not possible to determine what will be the path forward."

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The uncertainty comes as the ECB's staff projections show inflation pressures continuing to ease even as it remains above the central bank's 2% target.

According to the March staff projections, headline inflation is expected to increase 5.3% this year, down from December's forecasted increase of 6.3%. Next year inflation is projected to rise 2.9%, down from the previous estimate of 3.4%. By 2025, inflation is expected to increase by 2.1%, down from December's forecast of 2.3%.

Looking at growth, the ECB sees European GDP increasing 1% this year, up from December's forecast of 0.5%. Economic growth is expected to hold steady at 1.6% in 2024 and 2025, down from the previous forecast of 1.9% and 1.8%, respectively.

Lagarde said tighter monetary policies are expected to limit growth in the next two years.

In reaction to the ECB's hawkish stance, some analysts have said there is a growing risk that the central bank will push Europe into a recession.

Some analysts have said that the ECB is clearly looking to raise interest rates until something in the economy breaks. Some market analysts have also said that gold should continue to do well as an inflation hedge and safe-haven asset in this environment.

Thorsten Polleit, chief economist at Degussa, said that he expects this will be the ECB's last rate hike.

"The turbulence in the US banking market is raising dark clouds that banks in the euro area will certainly not be able to escape from - as the 20 percent drop in euro bank share prices already shows," Polleit said in a note, translated from German. "Monetary policy on both sides of the Atlantic is already much tighter than many market observers and central bank governors seem to suggest: real (i.e. inflation-adjusted) money supply is shrinking at very high rates, pointing to a slowdown, if not recession, and strong downward pressures on goods price inflation."

Although uncertainty in financial markets remains elevated, tensions have eased slightly after the Swiss National Bank offered Credit Suisse a lifeline to borrow up to 50 billion Swiss francs ($54 billion).

Liquidity issues at one of Europe's largest banks caused the share prices in Credit Suisse to drop more than 30% on Wednesday.

Although government regulators have been quick to put out specific fires in the global banking sector, many economists and analysts note that there are still significant underlying issues developing as the world continue to deal with aggressive rate  hikes from central band as they attempt to cool inflation.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.