FRANKFURT (Reuters) – Interest rate hikes by the European Central Bank (ECB) are just beginning to have their effects on the economy, but those effects could intensify amid turmoil in the banking sector, said Wednesday Christine Lagarde, the president of the institution.

As investors wonder if the ECB will be able to continue raising the cost of credit to fight inflation after the closure of two US banks and the emergency bailout of Credit Suisse, Christine Lagarde also pointed out that the ECB could be more aggressive if banks become more risk averse and start charging higher rates for borrowing.

“If, for example, banks start applying a wider ‘intermediation spread’ then the (ECB’s) response will become stronger,” she said, referring to the spread between her rates and those required by banks on a loan of any amount or duration.

Christine Lagarde also reaffirmed the ECB’s determination to bring down inflation in the euro zone, which came out last month at an annual rate of 8.5%, around 2%, and noted that the increases in the cost of credit decided until here were just beginning to affect the economy.

“For inflationary pressures to ease, it is important that our monetary policy works robustly in the direction of restraint,” she said. “And this process is only beginning to take effect today,” she added.

Since July, the ECB has raised its deposit rate by 350 basis points, to 3%, which represents an unprecedented rate since the creation of the euro zone. A new increase, which could peak at 3.5%, is expected by the financial markets during the year, after the one decided this month of 50 basis points.

Inflation in the region, which peaked at 10.6% last October, is slowing but, excluding energy, it continues to show sustained growth.

Speaking after Christine Lagarde at the same event in Frankfurt, ECB chief economist Philip Lane said, however, that he expected underlying prices to fall over time, with lower fuel costs likely to ripple through. on other sectors.

“There is reason to believe, looking at the indirect effect of energy on the benchmark…that there is data suggesting that measures of underlying inflation will ease with the time,” he said.

He stressed, however, that this forecast was based on wage growth peaking this year.

(Report by Francesco Canepa and Balazs Koranyi; by Claude Chendjou, edited by Blandine Hénault)

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