The European Central Bank will keep raising interest rates and may even need to restrict economic activity to tame inflation, ECB President Christine Lagarde said on Friday, singling out rates as the bank's key instrument over balance sheet reduction.
The ECB has raised rates by an unprecedented 200 basis points since July to tackle inflation, and said that more policy tightening is coming via rate hikes and the reduction of its 5 trillion euro debt holding.
"Interest rates are, and will remain, the main tool for adjusting our policy stance," she said. "Acknowledging that interest rates remain the most effective tool for shaping our policy stance, it is appropriate that the balance sheet is normalised in a measured and predictable way." The problem is that inflation, running at 10.6%, is far above the ECB's 2% target and even a recession, now almost certain over the winter months, is unlikely to ease price pressures enough to let the ECB step off the brakes.
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