THE European Central Bank (ECB) said Thursday that it expects record inflation “to remain elevated for longer than previously expected” but shied away from hiking interest rates, instead leaving the door open “to adjust all of our instruments, as appropriate, to ensure that inflation stabilises at its two per cent target over the medium term.”

Christine Lagarde, ECB president, told journalists in a press briefing on Thursday that raising interest rates to deal with inflation, which reached 5.1 per cent in January from 5.0 per cent in December 2021, may not work.

Instead she said the ECB “will continue reducing the pace of our asset purchases step by step over the coming quarters, and will end net purchases under the pandemic emergency purchase programme (PEPP) at the end of March”.

The ECB has been purchasing 80 billion euros of bonds per month, under its two programmes: 60 billion under the more recent Pandemic Emergency Purchase Programme (PEPP) — the programme which it said it will end in March — and 20 billion under an Asset Purchase Programme (APP). The purchases add money to the market. Reducing them also reduces the amount of money available to the market and should, in theory, cause interest rates to rise.

Lagarde, however, steering clear from directly raising interest rates in the eurozone, said half the higher inflation is driven by oil, gas and electricity prices.

“If the ECB were first of all to reduce and finish its asset purchases, then raise interest rates in short order, do you think it would have any impact on energy prices? No,” she said. Asked twice by journalists Thursday, Christine Lagarde declined to repeat previous comments that a rate hike was “very unlikely” this year. She said officials would pay careful attention to the numbers and revisit their inflation stance next month.

The bank sees inflation falling to 1.8 per cent in 2023, and that could be key because it indicates inflation will fall below the bank’s goal. That forecast is influencing decisions now to ensure the bank does not overreact and stall growth which has been subdued so far.

“Economic growth weakened to 0.3 per cent in the final quarter of last year. Nevertheless, output reached its pre-pandemic level at the end of 2021,” Lagarde said.

“Containment measures are affecting consumer services, especially travel, tourism, hospitality and entertainment. Although infection rates are still very high, the impact of the pandemic on economic life is now proving less damaging.”

Lagarde discouraged journalists from actions taken by her counterparts in the US and England. Bank of England on Thursday raise raised to 0.5 per cent, in a bid to cool soaring prices in Britain while warning that price increases in that country could pick up in the coming months.

In the UK, inflation, as measured by the consumer price index (CPI), is expected to peak at 7.25 per cent in April, and average close to six per cent in 2022. This would be the fastest price growth since 1991 and is well above the bank’s two per cent target.

Lagarde said that road map for the ECB had not changed and the bank remained “faithful to our sequence,” warning not to “assume too much” in terms of immediate rate rises after the end of bond purchases.

“We will not be complacent but we will not be rushed into a process, we will follow the sequence we have set for ourselves,” she said.

Interest rates in the eurozone are at record lows: One key benchmark is at zero and another is at minus 0.5 per cent.

In response to Lagarde’s comments during a press conference after the ECB governing council met on Thursday, investors increased their bets that the central bank will be forced to change course and raise rates several times this year.

Konstantin Veit, portfolio manager at Pimco, was quoted after the press conference by the Wall Street Journal that the ECB’s “hawkish message” signalled “more openness towards an earlier withdrawal of monetary policy support”.

The euro jumped to a more than two-week high against the dollar and a sell-off in eurozone bonds intensified after Lagarde declined to explicitly rule out an interest rate rise this year. The single currency was up 1.2 per cent at $1.143.