ECB President: June rate hike is the right decision, supply shocks are still spreading

European Central Bank President Lagarde stated in an interview with France’s Les Echos that the ECB’s decision to raise interest rates last month was correct.

In the interview with Les Echos on Thursday, Lagarde said:

“We firmly believe we made the right decision. As early as April, a vast majority of the Governing Council members were ready to make a decision, but at that time we did not yet have all the necessary information.”

Last month, after the outbreak of the war in Iran, the ECB became the first central bank among the G7 countries to raise rates. The ECB stated that the shock was gradually spreading throughout the economy, and the central bank could not risk letting inflation get out of control, which was why they decided to raise interest rates.

However, since then, the US and Iran have reached a peace agreement, which has led to a sharp drop in international oil prices, eliminating the main factor previously driving inflation up. The latest data released on Wednesday showed that the eurozone’s inflation growth slowed more than market expectations. Therefore there are now divided views within the ECB on whether further rate hikes are necessary.

Lagarde said that supply shocks are still spreading to other parts of the economy, but the so-called “second-round effects” have not yet appeared. She said:

“We are facing an external supply shock, which is spreading to other areas of the economy. We have already seen its indirect effects. At the same time, we are closely monitoring the risks of second-round effects, although so far such situations have not yet occurred.”

When asked if she would leave the ECB early, Lagarde reiterated her previous stance:

“We are once again in turbulent times. I believe as the captain of this big ship—the ECB—I should stay at my post.”

Asked whether she would play some role in next year’s French presidential election, she said she believes “a European voice should be heard.”

Lagarde said: “If this debate moves toward weakening France’s commitment to Europe, I think it’s necessary to point out that this would be an extremely painful path for our country and our fellow citizens.”

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