ECB says rate hikes are needed to reduce inflation in the Eurozone despite the recession

Interest rates will continue to rise as the eurozone enters a recession, a senior European Central Bank (ECB) official said. His statements follow the latest rate hike announced by the monetary authority last week and revised projections showing higher than expected inflation in Europe.

Luis de Guindos admits that “we have no choice but to raise interest rates“

Acknowledging that the eurozone is entering a recession, ECB Vice President Luis de Guindos nevertheless insisted that the regulator should continue to raise interest rates to keep inflation under control. With the indicator likely to remain well above the price stability target of 2 percent inflation in the medium term, the senior official told Le Monde, “We have no choice but to act.“

On Thursday, December 15, the ECB raised the deposit facility rate by 50 basis points to 2%. In the interview conducted the same day but published by Le Monde, Luis de Guindos acknowledged that the European economy is “perhaps in negative territory” in the fourth quarter of 2022. GDP is expected to contract by 0.2 percent, he said:

The leading indicators we have are not good. So our projections call for the Eurozone to fall into a mild recession in the last quarter of this year and in the first quarter of 2023, when GDP is expected to contract by 0.1 percent.

While the growth projections released in December are similar to the September estimates, those for inflation have changed significantly, the former Spanish economy minister noted. Inflation forecasts have been significantly revised upwards, from 5.5% to 6.3% for 2023 and from 2.3% to 3.4% for 2024, Luis de Guindos detailed.

At a press conference after last week’s rate hike, ECB President Christine Lagarde announced that there would be several more hikes next year. Asked whether this would make some governments unhappy, she pointed out that inflation is currently the main problem for European countries.

While admitting that higher interest rates will increase financing costs for European governments, Luis de Guindos insisted that the ECB must stick to its mandate. With inflation currently at 10%, the banker is convinced that “We have no choice… Because if we don’t control inflation, if we don’t put inflation on a convergence path towards 2%, it will be impossible for the economy to rebound.“

His comments come after the Federal Reserve raised the federal funds rate by 50 basis points in mid-December. The 0.5 percentage point increase follows four consecutive 75 basis point hikes.