ECB president Christine Lagarde said on Friday that the ECB should continue to raise borrowing costs to limit the expansion of the European economy. According to Lagarde, this is the only way to bring down inflation, which at its peak was five times the target level of 2%:

On Friday, Lagarde delivered a speech in which she said that the risk of recession had risen, but downturn itself won’t be sufficient to contain rising consumer prices. Despite ultra-aggressive tightening in the recent months, the ECB is set to raise rates by another 50 basis points in December, to 2%.

ECB officials are unanimous in saying that the cost of borrowing in the economy needs to be raised, but after two 75 basis point increases in a row, the pace is expected to slow to 50 basis points as a growing number of economic forecasts point to the risk of recession in the EU this winter.

According to Bloomberg, citing sources familiar with the matter, the base scenario for the ECB's December meeting is a 50 basis point rate hike. However, this outcome is based on the assumption that incoming November inflation report does not point to another upside surprise.

In October, inflation in the Eurozone rose to 10.6%. According to the ECB official Guindos, it will remain elevated for the coming months. Like Lagarde, the official said that the weakening of the economy caused by the conflict in Ukraine and price volatility in the energy market did not allow for a natural decline in consumer price growth. 

Based on historical macro correlations, Lagarde said that a recession is not very effective in knocking down inflation especially in the short term. Given its current high level, monetary tightening is an important tool to fight price growth. 

Lagarde also said that the ECB plans to start QT next year and details of the program will be released in December. 

Fed official Bullard (moderate hawk), who commented yesterday, also tried to prepare the market for further policy tightening. According to him, even “dovish” scenarios for future Fed meetings imply a further increase in the federal funds rate. The official also said that a number of recent rate hikes have had a limited effect on inflation, and the lower bound of the restrictive monetary policy that the Fed seeks to pursue will be at the level of 5%. This means that the Fed will deliver at least another 125 bp tightening in the meetings in 2022 and 2023. 

At the same time, the US economy continues to send positive signals on inflation. Freddie Mac, a major player in the US mortgage market, reported that this week mortgage rates fell sharply to 6.61%, the strongest weekly change since 1981. According to the company, this is a signal that inflation in the US has passed its peak. 

Data on residential building permits and home start-ups indicated a slowdown in residential property investment in October and a possible decline in the coming months. Both indicators declined by 4.2% and 2% respectively.