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