UPDATE- Inflation to remain 'undesirably high' for some time, says ECB chief

UPDATES WITH MORE REMARKS FROM ECB HEAD; REVISES DECK

By Aysu Bicer

ANKARA (AA) - Eurozone inflation will remain "undesirably high" for some time owing to continued pressure from energy and food prices, European Central Bank (ECB) chief Christine Lagarde said on Thursday.

The bank hiked rates Thursday for the first time in over a decade after eurozone inflation hit its highest level on record.

It decided to raise three key rates by 50 basis points – more than expected – as euro area annual inflation spiked to 8.6% in June, far above the ECB’s 2% inflation target.

"Economic activity is slowing. Russia’s unjustified aggression towards Ukraine is an ongoing drag on growth," Lagarde told reporters after a monetary policy meeting.

She said the impact of high inflation on purchasing power, continuous supply constraints, and higher uncertainty are having a dampening effect on the economy.

Firms continue to face higher costs and disruptions in their supply chains, she warned. "Although there are tentative signs that some of the supply bottlenecks are easing, taken together, these factors are significantly clouding the outlook for the second half of 2022 and beyond."

The war may also further dampen confidence and aggravate supply-side constraints, while energy and food costs could remain persistently higher than expected, she underlined. "Faster deceleration in global growth would also pose a risk to the euro area outlook."

- Fiscal policy to cushion impact of war

Lagarde also said economic activity continues to benefit from the reopening of the economy, a strong labor market, and fiscal policy support.

"In particular, the full reopening of the economy is supporting spending in the services sector," she said, adding that as people start to travel again, tourism is expected to help the economy in the third quarter of this year.

Consumption is being supported by the savings that households built up during the pandemic and by a strong labor market, she underlined.

"Fiscal policy is helping to cushion the impact of the war in Ukraine," she added.

The bank also unveiled a new tool called the Transmission Protection Instrument (TPI) to protect the transmission of monetary policy across the euro area, according to an ECB statement.

But Lagarde gave few details on the new mechanism, sowing doubts grew over its use as an additional monetary policy tool.

Via the tool, the bank aims to restrain the risk of eurozone fragmentation.

Following the bank's decision, the euro was little changed at $1.0181.