Recession alone won’t tame inflation: Lagarde

European Central Bank (ECB) President Christine Lagarde warned that a “mild recession” is possible but that it wouldn’t be sufficient in itself to stem soaring prices.

Speaking a week after the ECB’s second straight 75 basis-point hike in borrowing costs, and as fears mount that the energy crisis will drag down output in the 19-nation euro zone, Lagarde said “we don’t believe that that recession will be able to tame inflation.”

While a contraction isn’t her “baseline” scenario, Lagarde’s Latvian colleague, Martins Kazaks, said he expects one in the coming months. Executive Board member Fabio Panetta, meanwhile, warned about the economic risks of rapid rate rises.

The comments are part of a raft of public appearances by ECB officials, as investors and analysts ponder the twin challenges of record price growth and a likely economic downturn, due largely to Russia’s invasion of Ukraine.

Ten of the Governing Council’s 25 members are speaking, days after data showed consumer prices surged 10.7% in October — more than anticipated and more five times the official target. The focus is now on what action will be taken next month at the final policy meeting of 2022, with hawks and doves alike agreeing that further hikes are needed.

It’s not just rates, which were doubled to 1.5% last month in the most aggressive monetary-tightening cycle in the ECB’s history but still lag behind those in the US. Officials are also debating how to shrink the roughly €5 trillion ($4.9 trillion) of bonds purchased as stimulus during recent crises. The plan is for December’s meeting to agree on that process, known as quantitative tightening.

Lagarde also said officials must be attentive to the knock-on effects of the rapid interest-rate increases being enacted by the Federal Reserve.

“We have to be mindful of each other and we have to be attentive to potential spillovers and spill backs, as I think the Fed is also mindful of,” the ECB president told a conference in Riga, Latvia, the day after the Fed’s latest three-quarter-point hike.

“Each of us, just like the ECB, have our respective mandate, and while we have to factor in such elements like the Fed monetary-policy decisions and other elements of an international nature that will help us determine the best monetary policy, we’re not alike and we can’t progress at the same pace, and the same diagnosis of our economies.”

—Bloomberg