The European Parliament has praised the President of the European Central Bank (ECB), Christine Lagarde, for her fight against inflation, but warned her not to give in to demands from the financial sector and politicians to cut key interest rates.

"In an extremely turbulent geopolitical, economic and financial environment, the ECB has succeeded in almost restoring price stability in the euro area economy. Price stability remains the ECB’s first and foremost task," said ECR MEP Johan van Overtveldt, Rapporteur on the ECB annual report 2023, which will be adopted in Strasbourg on Tuesday. "But the fight against inflation is far from over. Bringing it to a successful conclusion is the most important contribution the ECB can make to the well-being of European citizens and to meeting the enormous new challenges we face," he continued. "It is essential that the ECB retains its full independence now and in the future."

Van Overtveldt believes that the 2 per cent inflation target is already within reach:
"Headline inflation is again tentatively approaching the annual inflation target. However, core inflation, which strips out volatile energy and food prices, remains stubbornly higher than headline inflation. This is mainly due to price increases in the service sectors of the economy," he explained.

A worrying trend, however, was the significant increase in unit labour costs in several euro area member states. Van Overtveldt therefore warned against premature interest rate cuts:
"We are not yet back to a situation where consumers, producers and investors automatically take low and stable inflation rates into account in their decisions."

According to the Conservative rapporteur, Europe also needs to prepare for stronger price shocks in the future:
"Important structural changes have taken place that should not be neglected and are still evolving. The favourable framework of the past ensured a very flexible supply side of the economy, which was able to absorb changes in aggregate demand relatively easily and without major inflationary outbreaks. While technological progress continues unabated, other elements of yesterday’s stability have undergone a major metamorphosis. The war in Ukraine and tensions between China and the West, as well as the aftermath of the COVID pandemic, have destabilised many international supply chains. We can therefore expect price shocks to become not only more frequent but also more persistent," said van Overtveldt. "The ECB’s task of ensuring price stability and financial stability will not become any easier, on the contrary."

Finally, van Overtveldt called for bolder measures and scepticism about econometric models in the future:
"Asymmetric decisions must be avoided. In the past, when there were signs of an economic downturn, action was often taken immediately. Too often, however, this highly accommodative policy has been withdrawn too slowly and too hesitantly. Given the adverse developments on the supply side of the economy, such an asymmetry would be even more problematic now than in the past.

"In addition, less emphasis should be placed on econometric models. Their performance has been and remains abysmal. They need an urgent and fundamental overhaul.

"Financial markets need to accept the return of reality. Debt-financed financial constructions that lead to short-term easy profits, but also — and more importantly — to situations of high risk of burning, must be curbed. The accumulation of systemic risks through exotic financial constructions must come to an end. Financial intermediation is there to support jobs, investment and real value creation, not to provide huge profits for speculators and useless financial engineering.

"Finally, political authorities must take responsibility for more sustainable public finances, which by definition are theirs alone. Budget deficits must be reduced and the relentless rise in debt ratios must be halted. We call on the ECB to fulfil its legal obligations. Politicians must do the same and stop hiding behind cheap excuses."

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