Lagarde pointed to economic weakness and stressed wage pressure, causing the euro to fall 25 points in the short term

At 20:45 Beijing time on Thursday (June 15), European Central Bank President Christine Lagarde held a press conference, pointing out the recent economic weakness and stagnation, and emphasizing wage pressures. As of press time, the euro fell more than 25 points against the dollar to 1.0851, with a cumulative fluctuation of nearly 30 points.

Earlier, the European Bank raised interest rates by 25 basis points as scheduled, raising borrowing costs for the eighth time in a row. Interest rates rose to the highest level in 22 years and opened the door to further interest rate hikes, even as the euro zone economic growth faces stagnation. Coupled with the release of the US jobless claims last week was higher than expected and the previous value, the euro rose nearly 50 points against the dollar in the short term.

Lagarde: The economy has stagnated in recent months, and growth is likely to remain weak in the short term, with uncertain growth prospects and highly uncertain inflation. But growth is expected to strengthen later this year, with companies in some sectors able to maintain high profits.

Lagarde: The manufacturing sector continues to weaken, and the government should withdraw energy support measures. But the service sector remains strong, and underlying price pressures remain strong, and long-term inflation expectations need to be monitored. Past increases in energy prices and backlogged demand are still driving up prices.

Lagarde: The labour market remains a strong source of support and poses upside risks to growth. Wage pressures are increasingly an important source of inflation. Recent wage agreements have increased upside risks to inflation.

The Federal Reserve broke a streak of 10 interest rate hikes overnight, a strong signal for global investors that the current tightening cycle in advanced economies is coming to an end, even if further US rate hikes are still possible.

But for the ECB, headline eurozone inflation remains unacceptably high at 6.1 per cent - more than three times its 2 per cent target - and core inflation, which usually excludes food and energy, has only just begun to slow. The ECB cannot afford to pause until core inflation falls significantly.

Stefan Grach, a former deputy governor of the Central Bank of Ireland, said the Governing Council had misjudged inflation at one point and would not jump to the conclusion that a rate rise was sufficient. Isabel Schnabel, a member of the ECB's executive board, said this month that the cost of doing too little was still higher than the cost of doing too much, given the high degree of uncertainty that persists over inflation.

The economy presents a mixed scenario

Eurozone unemployment is at historically low levels and wage growth is picking up, though still lagging behind inflation. Underlying prices, particularly in services, have yet to see the decisive decline that ECB policymakers say they need to see before easing monetary policy. Higher borrowing costs have dampened demand for credit from households and businesses and banks' willingness to lend, but nominal consumption has held up well.

Dan O'Brien, chief economist at the Institute of International and European Affairs, said: "We have had a terrible winter which, based on all previous analyses, should have led to a severe recession in Europe. But it is worth noting that we have passed that period and the European economy remains resilient, which also means that inflation is still there until it starts to fall and there is no clear sign that underlying inflationary pressures are improving, the ECB will continue to apply the brakes."

This summer, travel orders and spending in Mediterranean countries such as Spain are expected to rebound to pre-epidemic levels. This will lead to a further surge in airfare, hotel and holiday package prices, which have risen by double digits over the past year.

Mark Wall, chief economist at Deutsche Bank, predicted that the strong tourist season would be enough not only to reverse the recent downward trend in underlying price pressures before the European Bank's July meeting, but also by September.

There are reasons for continued ECB tightening, not least because not only did it fail to anticipate the severity of this bout of high inflation, but it also started raising rates later than many of its global peers last year. And, the ECB is expected to raise rates by the same amount again in July, a move many policymakers have already pointed to. Although action after July is less certain, investors have actually pushed up their interest rate expectations, with deposit rates peaking or eventually rising to 3.85%, suggesting that another rate hike after July is increasingly likely.

It is necessary to balance inflation and growth

But two quarters of contraction in industrial powerhouse Germany have dragged the eurozone into a mild recession, and the economy is likely to grow only modestly this year. After hitting double digits at the end of last year, overall price growth has been falling rapidly, thanks to lower energy prices and the most aggressive rate hike in the ECB's 25-year history.

In light of the recent disappointing growth outlook, other ECB watchers believe there may be only one more rate hike after this week as the debate over the trade-off between inflation and growth becomes more balanced.

Fabio Panetta, a member of the European Central Bank's board, said: "We will feel the effects of monetary tightening in the coming months." He added that this could "translate into a prolonged period of subdued activity or even a technical recession".

Holger Schmieding, chief economist at Berenberg Bank, said: "The economy is in a mild recession, inflation is falling, global headwinds are hitting manufacturing and credit volumes are starting to contract, all of which strengthen the dovish case against further tightening."