Interview with Grupo Vocento

Interview with Christine Lagarde, President of the ECB, conducted by Adolfo Lorente, from El Correo

5 March 2023

Will you raise interest rates by another 50 basis points at your March meeting?

It is very likely that we will raise interest rates by 50 basis points. This was a decision that was indicated at our last monetary policy meeting and all the numbers we have been seeing in recent days are confirming that this interest rate hike is very, very likely.

Inflation, especially underlying inflation, is still very high. Are the ECB’s measures not producing the results that you expected?

First, I would point out that headline inflation has gone down in recent months, and will continue to decline in the next few months. Core inflation, which in the euro area excludes energy and food, is too high. In Spain, where this indicator also includes processed food, it stands at 7.7%. The way forward is clear: we have to continue to take the measures needed to bring inflation back to 2%. And we will do so.

What is the time frame for deciding whether you will change pace and moderate the rate hikes? Perhaps at the meeting before the summer? Or at the end of this year?

We are data dependent. Many governors are making suggestions or predictions and giving their opinion and personal analysis. As President of the ECB I have to be focused on the decision-making, which needs to take into account the data. These include our macroeconomic projections, the latest figures and the impact of our measures over time. And, of course, the views of all the governors in the Governing Council. What I am certain about is that we will return to our 2% target in a timely manner and that we will be resolute and determined in doing so.

Many experts are already talking about interest rates rising to 4% and they are not even ruling out further rate hikes in 2024. What is your ceiling? Have you set a limit?

The ECB doesn’t have a ceiling, but an inflation target of 2%. That is the medium-term inflation target, which is how price stability is defined for us. As I said, I cannot tell you how high rates will go. I know that they will be higher than they are now and we still have more work to do because we cannot declare victory. We are making progress, but we still have work to do.

Governments are warning that further rate hikes may greatly complicate the recovery. Are you worried about this?

My main concern is inflation. We don’t want to break the economy; that’s not our goal. Our goal is to tame inflation. And as a central bank, interest rate hikes are our main tool to achieve that. Raising interest rates dampens demand and reduces inflationary pressures. For the moment, the economy is resilient, employment is robust and unemployment is the lowest it has ever been.

Families are suffering a lot from inflation. They are suffering through their electricity bills and the cost of their weekly shopping. Should governments act by giving more public aid or lowering taxes?

I know that people are suffering from inflation, particularly the most vulnerable and those who are most exposed, pensioners with low incomes. At the ECB we believe that government support should be targeted at those vulnerable people. And that it should be temporary. When the situation improves, when energy prices go down and when food prices stabilise, governments should then be in a position to withdraw the support. And the measures should be tailored so that they encourage people to save energy rather than use it as if it cost nothing.

What is your message for the millions of Spanish families that have variable rate mortgage loans and are suffering from higher interest rates?

Variable rate loans are a double-edged sword. When interest rates are very low, people benefit from reduced payments. But when rates rise, as they have had to in order to tame inflation, monthly payments increase. I’m sure many banks are ready to negotiate in order to ease the burden on households over time. It is in the banks’ interest to do so, because they know that when inflation is under control, interest rates will ultimately go down. And they don’t want non-performing loans on their balance sheets.

In Spain, the minority party in the [coalition] government is calling for a cap [on the rates] on variable loans to mitigate the increases. Do you think this measure is feasible?

This is determined by the relationship between borrowers and lenders. I’m sure many banks are prepared to reconsider loan conditions and prepared to spread repayments over time. And not out of charity. Don’t get me wrong. The banks have their legitimate business and are part of the solution. It is in their interest to avoid non-performing loans and to have borrowers with good credit.

The banks are making billions thanks to the rate hikes. But in Spain, for example, they are still not remunerating customer deposits. Do you think they should?

Again, we are talking about the relationship between a bank and its customers. When interest rates increase, when the cost of borrowing rises, clearly remuneration on deposits is up for discussion and can be increased.

The latest macroeconomic forecasts by institutions such as the European Commission are more optimistic than expected. Do you share this optimism?

We will publish our own projections in two weeks’ time, so I will tell you then. But I am confident that headline inflation will go down in 2023, while core inflation will be stickier in the near term. And I expect somewhat better economic growth compared with the stagnation in the last quarter of 2022. But we’ll update the projections in two weeks, and we’ll publish the numbers then.

Nevertheless, the geopolitical situation is extremely complicated, especially as a result of the war in Ukraine. Is there a real risk of recession, or has that already gone away?

The projections by ECB staff do not include a recession in 2023. We anticipate positive growth and increased activity over the course of the year. But it’s true there is huge uncertainty. A little more than a year ago, we could never have imagined that there would be a war right on Europe’s doorstep. What will happen over the coming months is uncertain.

In recent years, countries like Spain have been heavily reliant on the ECB’s monetary stimulus and zero interest rate policy. Is our country prepared for this new scenario?

Looking at the economic figures for Spain, they are quite robust. Take GDP, for example. It is better than in many other Member States. Inflation, too, is better than in other Member States. It’s true, however, that the unemployment figures, at almost 13%, are not as good as the euro area average, which stands at 6.7%. Now, of course, public spending has to be kept under control and appropriate measures need to be taken that are targeted, temporary and tailored in order not to squander public spending and to tailor it properly so that it doesn’t fuel demand excessively.

Are you worried that risk premium problems might rear their head again?

We are keeping a very close eye on this. Currently, we are not seeing any abrupt movements or fears that may give rise to an unwarranted increase in the risk premium. We are very vigilant and I think we have the necessary tools to address these risks should they arise. And, if need be, we will use those tools.

Public spending has skyrocketed to deal with the crisis. Aren’t you afraid that debt might be the next big crisis?

Public debt has increased globally. I’m thinking about low-income countries in particular. What we are seeing in advanced economies – and this is the case in Europe and Spain – is that public debt was high to begin with and increased quite a lot during the COVID-19 pandemic in order to keep the economy afloat. This was the right policy response at that time. But now fiscal policy needs to adjust. And this adjustment needs to take place within a European framework and fiscal governance that will hopefully be decided soon.

The ECB continues to play a crucial role. Does the spirit of Mario Draghi’s famous statement to do “whatever it takes” delivered in London in 2012, which helped save the euro, live on?

Yes, undoubtedly. And we will do whatever is needed to return inflation to 2%. Mario was dealing with another situation and times were different, and that message was very much called for and had an immediate impact. I see our action as being more sustained because inflation is a monster that we need to knock on the head and keep at 2%.

Is it sustainable for a government to index pension increases to inflation and to do so by law?

Inflation indexation has not helped us in the past and has generally contributed to fuelling inflation that had got out of control. Our economies became hooked on it. I don’t think it would be a good idea to go back to that.

Do you think it’s time that employers and unions reached a wage agreement to deal with this situation?

Yes, absolutely. I think this would be the most intelligent thing to do.

This seems impossible in Spain...

You know, what seemed impossible two or three years ago is possible today. For example, we never thought that Europe would borrow jointly to create the Recovery and Resilience Facility to support those countries most affected by the COVID-19 pandemic. The issue we’re facing now is that we have inflation that is too high and interest rates that are being raised to keep it under control. This situation calls for adults in the room who can sit down and decide what is in the interest of all stakeholders, not just one versus the others, but all of them. So, I would hope that it’s possible.

Ten years on from the financial bailout, what is the state of the Spanish banking sector?

Spanish banks have consolidated considerably. They are much stronger and have higher capital ratios. They are a little below the euro area average but overall they are still much stronger than they were a few years ago.

Bankers’ high salaries are once again at the heart of the debate. Should they be lowered?

It’s not for the European Central Bank to make those decisions. But there is obviously a reputational side to those kinds of decisions that bank leaders should be aware of.

Spanish banks have strongly criticised the new exceptional temporary levy approved by the government. What do you think of this new levy?

The ECB was called upon to give an opinion, which is what we did. We raised several issues, particularly regarding the basis on which the levy would be established, the potential impact it would have on financial stability and on the robustness of banks. We published our opinion, so I don’t have anything else to add.

A few years ago there was a great deal of pressure on banks to consolidate at the European level. Do you think this should happen? And what about in Spain?

I think the main thing we have to do as a central bank is work with the European Commission to eliminate the hurdles that may be hampering the consolidation process. All of the constraints that prevent banks from creating synergies, becoming more competitive and providing better financing to firms and households should be eliminated. Our job is to help remove these obstacles. It is up to banks to decide how they want to organise their business. They are the ones who decide whether or not they want to merge.

What do you make of Ferrovial’s decision to move its head office to the Netherlands for legal certainty reasons?

I won’t make any assessment in this particular case. What I will say is that Europe really needs to make progress on completing the capital markets union. Although we share the same currency, European markets are fragmented, with different legal frameworks and different taxation rules. We need to streamline all of this to make it easier for European businesses to obtain financing and to grow. We are moving in the right direction, but more still needs to be done.

This interview was published in El Correo, El Diario Vasco, El Diario Montañés, La Verdad, Ideal, Hoy, Sur, La Rioja, El Norte de Castilla, El Comercio, Las Provincias and La Voz de Cádiz.