ECB must keep raising rates

The European Central Bank must keep raising interest rates to fight off inflation, even if the probability of a euro zone recession has increased, ECB President Christine Lagarde said in an interview published on Tuesday.

"Our mandate is price stability, and we have to deliver on that using all the tools we have available," Lagarde told Latvian news outlet Delfi, largely repeating last week's policy message. "We are determined to do what is necessary to bring inflation back to our 2 per cent target."

The ECB has raised interest rates by a combined 200 basis points over the past three meetings, and markets are pricing in a string of further moves that would take the 1.5 per cent deposit rate close to 3 per cent in 2023.

"The destination is clear, and we are not there yet," Lagarde said without specifying where rate hikes might end. "We will have further rate increases in the future."

Inflation rose to 10.7 per cent in October and is expected to stay above the ECB's 2 per cent target through 2024, raising the risk that businesses and households start adjusting their behaviour as they lose trust in the ECB's willingness to get it back down.

"The longer inflation stays at such high levels, the greater the risk that it spreads throughout the economy," Lagarde said.