Lagarde of the ECB warns that some fiscal policies in Europe could lead to too much demand.
Christine Lagarde, the head of the European Central Bank, said on Friday that the fiscal policies of some European governments could lead to too much demand and that fiscal and monetary policies need to work together for steady, balanced economic growth.
At a conference in Bangkok held by the Bank of Thailand and the Bank for International Settlements, Lagarde said, “Fiscal policies that create too much demand in an economy with limited supplies could force monetary policy to tighten more than would be needed otherwise.”
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“Unfortunately, at the moment, at least some of the fiscal measures that we are looking at from many European and especially euro area governments point in the direction of the second group,” she said, referring to measures that could cause too much demand.
The European Commission thinks that the economy of the eurozone will shrink in the fourth quarter of 2022 and the first three months of 2023. This is because rising energy prices and interest rates will make people less likely to spend, borrow, and be confident.
“We need more investment and structural changes to get rid of the supply constraints and make sure that the changing global economy doesn’t hurt the potential output.” “And that is a big question and a big unknown for us,” said Lagarde.
“And in a world where external demand is less certain, we will also need to strengthen domestic supply and demand through higher productivity growth,” she said.
With inflation running at five times the ECB’s target of 2%, the bank has raised interest rates at the fastest rate ever. More rate hikes are likely in the coming months, as it will take years to stop price growth.
In just three months, its rate on bank deposits went up by 200 basis points to 1.5%.
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“What we need to do as central bankers are come up with a monetary policy that sets expectations… “We need to show the public, observers, and commentators that inflation will always return to our medium-term goal on time, no matter what,” said Lagarde.
