Christine Lagarde vows monetary shock therapy, but overkill risks are rising

Christine Lagarde has dashed hopes for an early end to monetary tightening in Europe, warning that inflation remains far too high and pointedly rebuking markets for doubting

the stern resolve of the European Central Bank (ECB). The ECB’s president said recession risks have receded after the dramatic fall in gas prices over recent months, while

the labour market is as tight as a drum with unemployment at rock-bottom levels. “The jobs market in Europe has never been as vibrant as it is right now,” she told the World

Economic Forum in Davos. All exotic measures of inflation are telling the same story of stubborn price pressures, which is a ‘de-anchoring’ of inflation expectations if the

ECB relaxes its grip too early.  “Headline, core, sticky, inflation, whichever way you look at it, is way too high. We shall stay the course until we have moved into

restrictive territory for long enough so that we can return inflation to 2pc,” she said. Minutes released by the ECB this week suggest that the Governing Council is even

more hawkish than thought, with several members pushing for a 75 point rise at the last meeting in December.  The bank has raised rates by 250 points since last summer, as

well as halting bond purchases. It will start to drain liquidity with quantitative tightening this quarter. It is the most aggressive monetary squeeze since the creation of the

euro. Markets are pricing in another 100 points by March but Mrs Lagarde hinted that ECB intends to go further. “I would invite them to revise their position; they would be

well-advised to do so,” she said.